( So much for the PBOC taking on moral hazard - until the unidentified buyer is identified , the assumption will be that it is the PBOC... )
China Trust "Bailout" To "Unidentified Buyer" Distorts Market As "Risks Are Snowballing"
Submitted by Tyler Durden on 01/27/2014 10:35 -0500
In a 2-line statement, offering very few details, ICBC's China Credit Trust Co. said it reached an agreement to restructure the CEG#1 that ha sbeen at the heart of the default concerns in recent weeks. The agreement includes a potential investment in the 3 billion-yuan ($496 million) product but didn’t identify the source of funds, or confirm whether investors would get all of their money back. The media is very excited about this entirely provisional statement and we note, as Bloomberg reports, investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal which will involve the sale of investors' rights in the trust at face value (though no mention of accrued interest). As BofAML notes, however, "the underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time," and while this 'scare' may have raised investors' angst, S&P warns "a bailout of the trust product [leaves]Chinese authorities with a growing problem of moral hazard," and they have missed an opportunity for "instilling market discipline."
1) ICBC issues a 2 line statement on a CEG#1 restructuring - no details and no comments from anyone involved
China Credit Trust Co. said it reached an agreement to restructure a high-yield product that sparked concern over the health of the nation’s $1.67 trillion trust industry...Beijing-based China Credit Trust’stwo-line statement on its website didn’t identify the source of funds, or say whether investors would get all of their money back.
2) Investors claim they "could" be able to sell their rights to the CEG#1 trust to an "unidentified buyer" at par (though receive no accrued interest as far as is clear)
Industrial and Commercial Bank of China Ltd. told investors of a China Credit Trust product facing possible default about an offer in which they can receive back their full principal, according to an investor with direct knowledge of the offer.Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen.China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
3) “A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,”
As one analyst noted, the PBOC is running scared...“It indicates the government still won’t tolerate any ultimate default and retail investors will continue to be compensated in similar cases.”
4) This confirms S&P's recent warning that "A bailout of the trust product would leave Chinese authorities with a growing problem of moral hazard," and an opportunity for “instilling market discipline” will have been missed.
...said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
5) of course, China may have shown its moral hazard hand on this occasion but as BofAML warns, "We suspect that, at a certain point, the involved parties will be either unwilling or unable to bail them out [again], which may trigger a credit crunch...The underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time."
There are plenty more trust products facing maturity/default in the short-term...
The most volatile part of the system is the financial market and the weakest link of the financial market is shadow banking. Within the shadow banking sector, we believe that the trust market faces the biggest default risk because credit quality here is among the lowest.The stability of the shadow banking sector is based on public confidence and any meaningful default will chip away some of the confidence. We suspect that trust defaults by private borrowers may work on public sentiment gradually while any LGFV trust default may immediately trigger significant market volatility. 2Q & 3Q this year will be another peak trust maturing period.
( magic money bailout ? )
ICBC Offers Clients Option to Recoup Funds in Troubled Trust
‘Off the Hook’
Comment of note.....from the ZH Article below.....
( Zero Hedge clears this up quickly... or do they ? BTW , the Forbes story has disappeared ! )
No, There Is No Stoppage Of Cash Transfers In China
Submitted by Tyler Durden on 01/26/2014 21:35 -0500
Earlier today, Forbes managed to spook readers with a bombastic report that China's commercial banks had been instructed by the PBOC to halt cash transfers - something which would have dire implications on China's banking system ahead of its new year holiday, and send the banking system into a tailspin just as China is desperate to avoid all turbulence ahead of a potential shadow banking default.
Leaving aside the fact that one should typically rely on official PBOC advisories, posted quite clearly on its website (where one finds no mention of this notice), one could simply keep track of interbank liquidity indicators such as repo and SHIBOR, both of which dropped, indicating that liquidity actually improved.
Anyway, here is what really happened, as reported by China Compass. "Forbes columnist Gordon Chang claimed in a much-quoted item today that the Peoples Bank of China had instructed commercial banks to halt cash transfers. Chang's column, entitled “China Halts Bank Transfers,” specifically refers to Citibank's Chinese branches. The report is entirely misleading." Our advice - focus on the real "weakest links" in China's banking system, of which there are many and are backed by facts, not the least of which is the potential upcoming shadow banking default. Ignore groundless rumors and speculation.
More from China Compass:
According to Citibank China Customer Service, the bank is conducting a routine system upgrade over the first few days of the upcoming New Year bank holiday. System maintenance of this sort has occurred several times in the past.The PBOC has not—repeat not—asked Citibank to stop customers from wiring funds. Customers can still log on to their account to put in fund transfer requests at any time. The receiving bank (non-Citibank) will process the funds to be transferred on the next business day, as it always does. Because of the Lunar New Year break, the next business day is Friday Feb. 7. This is no different from the practice of banks throughout the world.Chang's understanding of Chinese culture evidently does not extend to the timing of bank holidays.
January 30, 2014 4PM is the afternoon of the Chinese New Year eve. Nobody will be around by 5PM as the Hong Kong stock exchange has a half-day trading day.
Citibank's customer web site offered the following notice:
1. Due to the system maintenance of People's Bank of China, Domestic RMB Fund Transfer through Citibank (China) Online and Citi Mobile will be delayed during January 30th 2014, 16:00pm to February 2nd 2014, 18:30pm. As to the fund availability at the receiving bank, it depends on the processing requirements and turnaround time of the receiving bank. We apologize for any inconvenience caused.
2. During Spring Festival, Foreign Currency Transfer Transaction through Citibank (China) Online and Citi Mobile will be temporally not available from January 30, 2014 18:00pm to February 7, 2014 09:00am. We apologize for any inconvenience caused.
If you have any enquiries, please reach us via our 24-hour banking hotline at 800-830-1880 or credit card hotline at 400-821-1880. If you are calling from other parts of the world, please reach us at 86-20-38801267 for banking services or 86-21-38969500 for credit card services.
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All that said, China certainly has all too real liquidity (and solvency) problems, as explained here extensively in the prior weeks and months, captured best by the fact that both China's and HSBC's CDS are both at multi-month highs.