In yesterday's most underreported story, which we noted first thing yesterday morning [16], China is on the verge of a second bond default just weeks after Solar cell maker, Chaori Solar, defaulted earlier this month, this time Zhejiang Xingrun (appropriately abbreviated ZX): a real-estate developer which just collapsed after its largest shareholder was arrested and which has some CNY3.5 billion in debt and furthermore the company was revealed to have been taking deposits from individuals offering annual interest between 18% and 36%.
But while Chaori was left to crash and burn, ZX may need a bailout for the same reason that we have always said - namely that China is desperate to keep kicking the can for as long as possible as any glimpse under the hood will reveal the true Chinese credit bubble nightmares, best summarized (previously [17]) in the following: "CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders." Which is why overnight the FT reported that none other than the Chinese central bank was scrambling to bail out the lender in order to avoid the inevitable liquidation avalanche that will begin as soon as the realization hits just how far China's non-existent collateral is stretched out.
From the FT [18]:
Officials from the government of Fenghua, a town in eastern China with a population of about 500,000, the People’s Bank of China and China Construction Bank, which was the main lender to the developer, were on Tuesday thrashing out ways to repay the company’s Rmb3.5bn ($566m) of debt.
Not surprisingly, local government officials were keen to downplay Xingrun’s fate, which quickly added fuel to jittery markets after Chaori defaulted previously. The "situation is not that serious yet", said a Fenghua local government official to the FT who only gave her surname Wu. Failure of a small property developer is not unusual in China or even in Zhejiang Province, where Xingrun is based. Well, it is if people start asking questions.
One can see why the local governments and administrators are eager to downplay the potential impact. As Bloomberg reported overnight [19], "some 66 percent of new Chinese developer dollar-denominated bonds sold this year are trading below their issue price amid the collapse of a private real estate company and news the housing market is cooling." In other words, the Chinese housing market is suddenly the perfect receptacle for a lit default match to lead to an all out panic.
About $6.3 billion of notes in the U.S. currency sold by property companies including Guangzhou R&F Properties Co., KWG Property Holding Ltd. and Shimao Property Holdings Ltd. (813) have fallen in secondary market trade, according to data compiled by Bloomberg. Prices on Kaisa Group Holdings Ltd. (1638)’s 2018 8.875 percent debentures dropped to a seven-month low yesterday while Shimao Property’s $600 million of 8.125 percent notes due 2021 and sold to investors at par in January were trading at 97.646 cents on the dollar.
Demand for developer debt is waning after government officials familiar with the matter said yesterday Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The value of home sales in the world’s second-biggest economy fell 5 percent in the first two months of the year after local governments stepped up measures to curb rising prices. The 7.5 percent economic expansion targeted by China this year would be the slowest since 1990.
“We’re cautious on property bonds short term, with the developers expected to report weaker year-on-year monthly sales data for March,” said Owen Gallimore, a Singapore-based credit analyst at Australia & New Zealand Banking Group Ltd. “For the majority of high yield property developers, January and February sales fell as tier three and four cities suffered from over supply and the smaller developers faced a credit squeeze.”
In other words, not only is the primary market frozen, but the secondary market is crashing further adding to the reflexive fuel that could be precisely the catalyst that unwinds the entire Chinese credit bubble:
China Resources Land Ltd. was the last company from China and Hong Kong to sell dollar debentures in Asia, adding $50 million to its existing 4.375 percent bonds due February 2019 on March 13.
The collapse in secondary prices comes less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. became the first company in China to default on its onshore corporate bonds.
All of this is happening as China is doing all it can (and has been for the past two years, without success) to cool its red hot housing market bubble, which unlike the US where the bubble is in the stock market, in China it is all about housing:
At least 10 Chinese cities stepped up measures to cool local property markets at the end of last year with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.
New-home price growth slowed last month led by Beijing, Shenzhen, Shanghai and Guangzhou, the four cities the government defines as first tier, the National Bureau of Statistics said today. Prices in Beijing and Shenzhen each rose 0.2 percent in February from a month earlier while they added 0.4 percent in Shanghai, the smallest increase since November 2012, and gained 0.5 percent in Guangzhou. Prices advanced in 57 of the 70 cities the government tracks, versus 62 in January.
Visually:
[20]
So all of the above would suggest the FT's report of an imminent, if stealthy, bailout of ZX is true, right? Turns out isn't.
In fact the PBOC was so pissed about the "condemned untrue foreign media report" it took to its Weibo microblog site to explain what really happened. As Bloomberg summarized, the Chinese central bank says it didn’t participate in an “emergency meeting held Tuesday” to discuss Zhejiang Xingrun Real Estate as reported by some unidentified media according to a statement posted on PBOC’s official microblog account. PBOC is not involved in dealing with risks from the developer, according to the statement.
For the purists, here is the official statement via Weibo [21]:
[Condemned individual foreign media untrue] March 18, individual foreign media reports, "China's central bank to discuss emergency aid small real estate company," inconsistent with the facts: First, the People's Bank did not participate in the text referred to "convene an emergency meeting on Tuesday." . Second, the People's Bank of Zhejiang Xingrun not involved in the disposition of property-related risks. False reports to the media release behavior in unverified cases, the People's Bank strongly condemned.
Well, it was google-translated, but the gist is clear.
So which is it: will China really let ZX fail and allow the second bond default in under a month to further slam the secondary bond (and much less relevant equity) market, while grinding the all important primary issuance market to a halt at precisely the time when credit creation in China is absolutely critical, or will the PBOC have been exposed as a liar once again.
Since the PBOC is merely a central bank, and thus lying is its bread and butter, our money is on the former, but one can only hope that in a world in which the Bernanke global put is now ubiquitous and perpetual, and the only investment calculus depends on the return/return analysis, that it will be "communist" China that finally allows risk back into the global investment equation.
And finally, putting it all into perspective, is our favorite chart showing bank asset creation in China and the US over the past five years. It needs no commentary.
