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China's Debt Maturity Problem Has Arrived

Tyler Durden's picture





 

We have discussed the seemingly irrepressible demand to lend companies money (for the implicit FX trade) in Dim Sum bond format a number of times and in the last few weeks yields on these bonds have risen further as the reality of a notable contraction in mainland credit conditions (along with a rationalization of the lax restrictions within the bonds themselves) starts to hit investors. Overnight, Bloomberg reports that Shandong Helon, a Chinese fiber maker and the first to lose its investment-grade rating (fallen angel), missed a 397mm Yuan loan payment, only serving to further stoke fears of the knock-on effects of a slowing Chinese economy dragged lower by global growth fears (except for the US which is off in faerie land), as ratings downgrades surged last year. Incredibly, no Chinese company has defaulted on its domestic debt since the country's central bank started regulating the market in 1997, according to Moody's but as Bloomberg notes, there is some 2 trillion yuan of bank facilities set to mature in 2012, compared to 33 billion yuan of bonds - leaving a very crowded-out market of shorter-dated debt rolls soaking up what little credit is willingly available. With Dim-Sum bond yields (based on our index of sizable issues) up over 30% (80bps) from early September and European-based USD strength slowing any CNY-FX decay these holders hoped for, we agree with Gao Zhanjan (of Citic Securities), via Bloomberg, that "there will slowly be more substantive defaults in the future".

 

While demand for Dim-Sum bonds has remained (and issuance steady) there has been a notable rise in yields as investors start to realize how the lax-covenant restrictions combined with a slowing Chinese economy (and a bank loan roll that is simply huge) will reduce creditworthiness. The hopes of an implicit FX trade gain on these bonds also faces pressure as USD safety flows slows CNY appreciation (and obviously credit losses will hugely outweigh any FX gains overall).

 

Chinese corporate bond downgrades have surged this year - as Bloomberg notes that:

Investors are growing increasingly concerned that downgrades and defaults will proliferate after China’s import growth fell to a two-year low in December and as the economy expands at its slowest pace since 2009.

 


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Wed, 01/11/2012 - 12:14 | Link to Comment Mr Lennon Hendrix
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China will dump dollars and USTs en masse.  Watch.

Wed, 01/11/2012 - 12:21 | Link to Comment SheepDog-One
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They should! Hell Ive been waiting for China to dump them for months!

Wed, 01/11/2012 - 12:23 | Link to Comment Mr Lennon Hendrix
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DXY 80 and USTs at highs you would think they would do it soon.  China is playing chicken with the Fed, and the Fed is waiting to issue QE X only a minute before war with Iran.

Wed, 01/11/2012 - 12:27 | Link to Comment SheepDog-One
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Probably, the next QE wont be for stocks it will be for war funding.

Wed, 01/11/2012 - 12:32 | Link to Comment DaBernank
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The FED has been funding war constantly since 1914.

Wed, 01/11/2012 - 12:32 | Link to Comment SheepDog-One
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World financial game of chicken, teetering on the edge of the cliff everyone daring for someone else to jump out first. Sick.

Wed, 01/11/2012 - 13:22 | Link to Comment rosiescenario
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....make that years............

Wed, 01/11/2012 - 23:43 | Link to Comment Eternalko
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I've waiting for this since September 2009. Really. Thought that they would do this in December 2009. As a nice present

Wed, 01/11/2012 - 12:23 | Link to Comment ZeroPower
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They have over $2TR in FX reserves.... >1.5Tr which is in USD reserves. While i agree a substantial dumping might hurt...i dont see this happening. They'd have to diversify into something else. They hate japs too much to even think about the JPY..and i think ever since theyve been buying their EURs at 1.30s++ and are now effectively underwater on that, theyre not too keen for further diversification into that POS.

If only the CAD AUD or CHF were liquid enough. Oh wait...theres also gold bullion. And silver for you metal-whores.

Wed, 01/11/2012 - 12:26 | Link to Comment Mr Lennon Hendrix
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They will buy the instruments that are coming due with their dollars, and buy yuan.  It is a monetazation of sorts but will also strengthen the yuan

Wed, 01/11/2012 - 14:49 | Link to Comment Redneck Hippy
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Why would they buy yuan when they can print all they want?  Despite all the pressure to revalue the yuan, there is a reason it fails to go up despite a continuing trade surplus.

Wed, 01/11/2012 - 12:54 | Link to Comment GeneMarchbanks
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"Wise man no invest in overcapacity" -Hendry.

Wed, 01/11/2012 - 12:23 | Link to Comment Cognitive Dissonance
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But...but...ass-hat Cramer was explaining to me just yesterday on CNBC that China was gonna fuel a second stock bull market and that we were at a significant bottom in stocks.

I kid you not.

Wed, 01/11/2012 - 12:24 | Link to Comment SheepDog-One
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I love the Cramer kiss of death....see ya later DOW 12,000's.

Wed, 01/11/2012 - 12:40 | Link to Comment WonderDawg
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I've been waiting patiently for the right time to load up on puts. If Cramer is calling a bottom, it's time.

Wed, 01/11/2012 - 14:44 | Link to Comment ucsbcanuck
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We're at a significant bottom in stocks? With the Dow where it is? Total BS!

That was to sucker the retail investors back in. Get ready for the crash...

Wed, 01/11/2012 - 12:25 | Link to Comment Manthong
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The more the US and EU markets seriously contract, the more the Chinese will be forced to more aggressively focus inwardly to expanding domestic consumption and outwardly to snagging ever more hard assets and natural resources. Not good for dollar or Euro.. Not good for US and EU ponzeconomy.. good for PM's, oil etc.

Wed, 01/11/2012 - 12:27 | Link to Comment Dick Darlington
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No wonder Nasdaq is green again.

Wed, 01/11/2012 - 12:30 | Link to Comment SheepDog-One
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Must be due to Apple's slave labor center FoxConn mass suicide dispute settlement.

Wed, 01/11/2012 - 12:45 | Link to Comment Mr Lennon Hendrix
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Was the settlement, "We kill you and find more slaves"?

Wed, 01/11/2012 - 13:11 | Link to Comment Financial_Guard...
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"We kill you and find more slaves"

Ancient Chinese secret?

Wed, 01/11/2012 - 13:25 | Link to Comment rosiescenario
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...LEAPS take on a whole new meaning.....not to disparage their well founded grievance....

Wed, 01/11/2012 - 12:34 | Link to Comment oddjob
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 Moodys is corrupt. Ignore anything that comes from them.

Wed, 01/11/2012 - 12:42 | Link to Comment The Vizier
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As push comes to shove I expect we'll soon be hearing of many cases of Chinese individuals having absconded with funds. Resulting increase in number of Chinese restaurants outside of China probably just a coincidence.

Wed, 01/11/2012 - 14:51 | Link to Comment Redneck Hippy
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Time to buy real estate in San Francisco and Vancouver.

Wed, 01/11/2012 - 14:54 | Link to Comment Redneck Hippy
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Time to buy real estate in San Francisco and Vancouver.

Wed, 01/11/2012 - 12:45 | Link to Comment HedgeAccordingly
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Does not really seem like the S&P's or crude care - Euro making new year lows every day - http://hedge.ly/yIHf44

Wed, 01/11/2012 - 12:47 | Link to Comment SheepDog-One
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And it was just a month ago that Rosenberg declared 'We're all EUR/USD pair traders from here on out'...thats now totaly broken as EUR/USD collapses to 1.27, and equities dont care. Well, for today anyway.

Wed, 01/11/2012 - 12:49 | Link to Comment yogibear
yogibear's picture

How are all those ghost cities and amusement parks working out? Having over a billion mouths to feed and over-saturating the market with cheap goods has to end some time. The 50% savings rate of Chinese, debt saturated west and virtually unlimited labor adds to the problems.

Wed, 01/11/2012 - 12:50 | Link to Comment junkyardjack
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I thought there was an article about a coupon payment holiday where they didn't have to pay interest anymore or maybe that was another country

Wed, 01/11/2012 - 13:10 | Link to Comment props2009
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EU zone to be in recession.

 

Key news items for 11 Jan 2012

http://fnn24.com/?p=36462

Wed, 01/11/2012 - 13:14 | Link to Comment JW n FL
JW n FL's picture

 

 

China has taken over the Government of the Untied States!!

 

New Bill Known As Enemy Expatriation Act Would Allow Government To Strip Citizenship Without Conviction

January 6, 2012

By Stephen D. Foster Jr.

The new law would change a part of US Code 1481 which can be read in full here. Compare 3166 to 1481 and the change is small. The new section makes no reference to being convicted as it does in section (7). So even though the language of the NDAA has been revised to exclude American citizens, the US government merely has to strip Americans of their citizenship and the NDAA will apply. And they will be able to do so without convicting the accused in a court of law.

http://www.addictinginfo.org/2012/01/06/new-bill-known-as-enemy-expatriation-act-would-allow-government-to-strip-citizenship-without-conviction/

 

 A request to the American People- Nationwide Protest against NDAA- ACTION ALERT

At noon until 7pm on February 3, 2012; the American people will protest against the National Defense Authorization act of 2012, in which are provisions which allow for the option for indefinite detention of American citizens in military custody, without charge or trial. This protest is non-partisan, and concerns our civil liberties, the preservation of which is a topic that those of all political persuasions can agree on.

Please refer to the below group on Facebook and the hashtag #Feb3 on twitter for organizational purposes.

https://www.facebook.com/events/335643799778967/

http://www.youtube.com/watch?v=9JLe5xP1fdg&feature=youtu.be

 

Wed, 01/11/2012 - 13:30 | Link to Comment Flakmeister
Flakmeister's picture

Serves them right for thinking immature debt would behave any other way....

----

Seriously, dump dollars for what??? Yuan?? Who is selling Yuan???

These are Yuan denominated loans... they will print and try to export deflation to the US...

Wed, 01/11/2012 - 13:33 | Link to Comment Georgesblog
Georgesblog's picture

After the trade balance in favor of China over the years, who would have imagined the words, "China" an "default" , in the same sentence? Yet, this is what happens when dysfunction in the market cycle occurs. Not only does what goes around, come around, it keeps on going.  This can only accelerate the global collapse in currencies. We will see the Euro and USD adjust, accordingly. It won't be pretty.

http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/


Wed, 01/11/2012 - 13:33 | Link to Comment chinaboy
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One thing we are sure about is that China is debt market is going to expand in coming years. It remains to see if the maturity thing ( when combined with expanding issuance) is going to bring buying opportunity. At this moment it is definately not. But when the time (price/yield) is right, do you know which one to buy and which one to ignore?

Wed, 01/11/2012 - 14:46 | Link to Comment ucsbcanuck
ucsbcanuck's picture

And that's the problem with China isn't it? You just don't know what to trust.

Wed, 01/11/2012 - 15:37 | Link to Comment chinaboy
chinaboy's picture

Frankly, with this attitude, you'll never know when (what) to invest. The key here is not about if it is China then you don't trust, it is telling good from bad given it is Chinese or Canadian. B.T.W., China has a lot more diverse opportunity than Canada (probally even the states). Unlike market in Canada or the States, price really drop when things go wrong. When good stuff drop in certain environment, opportunity comes.

Wed, 01/11/2012 - 15:59 | Link to Comment ucsbcanuck
ucsbcanuck's picture

"it is telling good from bad given it is Chinese or Canadian."

OK, agreed. But tell me - how do you tell if something is good or bad? You have to look at hard facts - statistics etc.

With China - it's hard to trust the statistics because, and you can't deny this, there has been rampant fudging of numbers going on. And how else can I collect data? Fly out to China and visit for 3 months to get a real idea? Sorry, but every time someone tries to tell me "China's going great" I'm going to think twice.

I got burnt in the dot-com boom - didn't lose too much, about 2k, but I had a real funny feeling about the whole boom, and I didn't trust my instincts. When I learnt to trust my instincts more, I got out in 2007 before TSHTF, learning from my previous experience. I'm getting the same funny feeling about China now. 

Previously I was long China via FXI in 2009. I bought in at 31, but exited at 36 and 41. I think it went up to around 44 - 45 before pulling back. This proved to be a smart move. 

 I'd like to buy back into China at some point, because I do see a lot of potential in the country, but right now just does not feel right. Especially when people who have their finger on the pulse are themselves worried about the situation.


Wed, 01/11/2012 - 16:17 | Link to Comment ucsbcanuck
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Don't get me wrong - if I thought Canada was fudging the numbers I wouldn't invest in Canada either.

" B.T.W., China has a lot more diverse opportunity than Canada (probally even the states)."

Really? So then explain to me why the top 1% in China is looking to get PRs in Canada and green cards in the US? If things are so hunky dory - why would the people who are most likely to get the most benefit out of it looking to move?

http://finance.yahoo.com/news/Top-of-Chinese-wealthys-wish-apf-3316521730.html

Riddle me that my friend, riddle me that.

Wed, 01/11/2012 - 16:34 | Link to Comment Smiddywesson
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But, but, but, this is The Century of China. 

Wed, 01/11/2012 - 20:14 | Link to Comment ciaoant1
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The Fraying of China’s Gilded Age http://the-diplomat.com/2011/11/25/the-fraying-of-china’s-gilded-age/?all=true

 

Is China a bubble? What about all those poor Chinese workers? http://whataboutmarx.blogspot.com/2012/01/on-china-part-2-is-china-bubbl...

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