It seems like it was only yesterday when China lied it would open up its bond market to real price discovery and unleash a wave of corporate defaults resulting from epic capital misallocation and central planning, consequences be damned. Well, one company, one single solitary company did default in March, and after the new bond issuance market ground to a halt, and coupled with the swoon in Chinese housing, the consequences were promptly undamned and every single company that was set for bankruptcy was bailed out in the last moment as once again China re-evaluated its options and decided to keep the status quo (the other being the so-called deleveraging and debt issuance slowdown which, paradoxically, resulted in the biggest increase in bank assets in history in Q1).
Which brings us to Huatong Road & Bridge Group, a company which as we reported last week [16]was set to be the second public default in China's massive interbank bond market after Chaori (and after countless others which would have gone tits up had it not been for government interventions), and technically the first principal default in China history (Chaori was only an interest payment default). Things seemed virtually assured after Huatong chief executive Wang Guorui was publicly dismissed from Shanxi province's Chinese People's Political Consultative Conference, a political advisory body, on suspicion he broke the law, according to a statement posted on the provincial government's website on July 10.
Well, those keeping track and hoping the second default would finally hit have to hold their breath again after yet another last minute bailout has now made a complete mockery of China's "deliberate" intentions to clear up the rot plaguing its bond market. As Reuters reports, Huatong avoided a "landmark bond default at the last minute on Wednesday, raising enough funds to pay off both principal and interest on a 400 million yuan ($64.51 million) bond."
Who bailed it out? Why the same government which continues to say one thing and do something totally different.
The people said there was aggressive fundraising by Huatong Road & Bridge Group Co Ltd, as well as collection of its accounts payable by a local government in Shanxi province, where the firm is based.
Danny Chen, chief credit officer at China Lianhe Ratings, which downgraded Huatong in response to that announcement, said while he could not comment absent a fresh official announcement, he expected the company to make some statement on Wednesday.
A bond trader at a commercial bank in Shanghai said news that Huatong had obtained enough funds to avoid default "isn't much of a surprise to the market".
"People had expected the local government and company to try to avoid default given the impact," he said. "You may argue that in the long run, one day such defaults will happen, but not for now."
Precisely: one day the full impact of delaying the inevitable will no longer be avoidable, and when that day comes run, because it will be the end of China's central planning regime. But for now, just enjoy the present, be hopeful and not cynical.
Amusingly it wasn't just the government that stepped in this time: it was also the underwriters of the bond, who know quite well that once the dominoes start tumbling, it is all over and the bank can i) kiss any hopes of generating interest income goobye and ii) will finally have to mark those trillions in bad loans on China's bank books to something resembling reality, in the process starting the biggest credit crisis the world has ever seen (there are $25 trillion in Chinese bank loans, or said otherwise: Lehman was a walk in the park).
Huatong's fundraising effort was aided by the bond's primary underwriters, China Guangfa Bank and Guotai Junan Securities, which sent teams to Huatong to ensure information disclosure and facilitate recovery. Bond analysts said that while yields on Huatong's bond last week surged to nearly 15 percent from 6 percent, the market priced in a delay in payment, not a permanent default, as Huatong largely appeared to have short-term liquidity problems.
So yes, it was a group effort:
Huatong had previously told media it expected strong support from the local government in rounding up overdue accounts receivable and in delaying collection of outstanding loans coming due.
Analysts said many receivables involved other local government bodies that had hired Huatong to build real estate projects, then delayed payment due to their own financial difficulties.
Reuters' conclusion:
The analysts also said avoidance of a default is unlikely to reassure China's fixed income markets, which have seen steadily rising rates for short-term debt as demands from cash-strapped companies for money continue.
"No market can sustain a status quo of no-defaults," a trader at an Asian bank in Shanghai said. "Chinese authorities will find one day that they cannot support all money-losing companies."
Yes, one day. But not today. For now let's all pretend that China is growing, that the global economy is recovering and the the system is stable. As for inconvenient reminders such as this one, that none of the above is true, well... see above about hope vs cynicism.
