And one day later we see proof of the theorem that the " quiet " ongoing crisis in't over..........
It Begins... Another High-Yield Chinese Shadow Banking Trust Defaults
Submitted by Tyler Durden on 02/12/2014 21:58 -0500
While the eyes of the world were focused on thenow infamous "Credit Equals Gold #1" Chinese wealth management product - it's imminent default and last-minute bailout by 'investors' unknown - the coal industry in China continued to collapse (as we noted here). We noted at the time how bailing out current high-yield product investors would merely amplify the problems down the line and it seems that Chinese authorities have heard that message. As Reuters reports, a high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday.
A high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday, in the latest sign of financial stress in China's shadow bank sector...."It matured on Feb. 7, but CCB passed on an announcement from Jilin Trust saying 'We currently can't be certain when (Liansheng) funds will be returned,'" the official Shanghai Securities News quoted an unnamed investor in the trust product as saying.Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds."Restructuring isn't bankruptcy. As far as we know, there is no problem with the firm's assets. The firm is in negotiations with investors," the paper quoted an unnamed Jilin Trust official as saying.
Backed by China's 2nd largest lender China Construction Bank (note we discussed the largest shadow-bank here), the product is as follows:
The fourth tranche of Jilin Trust's product is name "Songhua River #77 Shanxi Opulent Blessing Project" raised 289 million yuan from investors in February 2012, promising a 9.8% yield - we will see if this technical default results in actual losses for investors.
backed by a coal-industry loan to Shanxi Liansheng Energy Co Ltd...
Shares of China’s biggest listed coal producers have dropped to their lowest valuations on record as falling fuel prices make it harder to repay debt.China’s coal industry is “dead,” said Laban Yu, a Jefferies Group LLC analyst in Hong Kong with an underperform rating on all three stocks. “There are 10,000 producers in China. A lot of them are taking on debt. It gets harder and harder to service debts when coal prices keep falling.
and the risk of more defaults is not going away - in fact will onkly get worse in the next 3 months!!
For those who have forgotten, below is a quick schematic of what a WMP looks like:
As Michael Pettis, Jim Chanos, Zero Hedge (numerous times), and now George Soros have explained. Simply put -
"There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years."
The "eerie resemblances" - as Soros previously noted - to the US in 2008 have profound consequences for China and the world - nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.
The bottom-line is that China seems to be testing the reaction of markets to small 'technical' defaults (such as this one)...
Technical defaults caused by repayment delays have occurred before, but market watchers say that China's shadow bank sector is still waiting for a precedent-setting default in which investors are forced to absorb substantial losses.Such an event could shatter the widespread assumption that even high-yielding investments carry an implicit guarantee from state banks. But Jilin Trust is apparently still looking for ways to recover investors' funds.
The question is - doe s the PBOC really think that desparate borrowers will stop borrowing - and contract the size of the shadow-banking system reining in the out of control credit creation (and its subprime-like consequences)...
...borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.
So the PBOC's efforts are merely exacerbating the situation for the worst companies...
However, this just hit the wire...
- *CHINA BANS BOND TRADE BETWEEN PROPRIETARY, WMP ACCOUNTS
Which sounds ominously like the PBOC won't allow banks to bail their own WMP investors out and take the risky crap back on their off-balance-sheet books... i.e. The PBOC wants real defaults... not 'technical' defaults
Think China's Credit Crisis Is Over? Don't Look At This Chart
Submitted by Tyler Durden on 02/11/2014 22:24 -0500
The bailing out of the much-watched 'Credit equals Gold #1' wealth management product and safe liquidity-strewn (CNY375 billion from the PBOC) survival of the lunar new year liquidity crunch has many believing the worst is over. Though we discussed this fallacy in great depth here, the following chart of the total collapse in the largest Chinese coal producers says this is far from over. Trading at or below book values, investors are clearly signaling concerns about the quality of assets summed up perfectly by one local analyst - China's coal industry (whose loans back a massive amount of the wealth management products) is "dead."
Shares of China’s biggest listed coal producers have dropped to their lowest valuations on record as falling fuel prices make it harder to repay debt.Bloomberg's chart above tracks the price-to-book ratio of China Shenhua Energy Co., China Coal Energy Co. and Yanzhou Coal Mining Co. Both China Coal and Yanzhou Coal trade below the value of their net assets, while Shenhua Energy has fallen to about 1 times book. The lower panel shows the CSI 300 Index’s energy gauge traded at a record discount to the MSCI All-Country World Energy Index last month.Slowing economic growth and efforts to boost use of alternative fuels have dragged down coal prices in China, the world’s biggest producer and consumer of the fuel.The nation’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, two people with knowledge of the matter said last month, signaling government concern about possible defaults.China’s coal industry is “dead,”said Laban Yu, a Jefferies Group LLC analyst in Hong Kong with an underperform rating on all three stocks. “There are 10,000 producers in China. A lot of them are taking on debt. It gets harder and harder to service debts when coal prices keep falling.”China Coal warned Jan. 24 that 2013 net income will probably drop as much as 65 percent from a year earlier. The second-largest producer had 50 billion yuan ($8.3 billion) of net debt at the end of last year, from net cash of 6 billion yuan in 2011, according to a Barclays Plc note last month. The stock has tumbled 82 percent from its 2008 peak.Declines in Shenhua, the listed unit of China’s No. 1 coal producer, have erased $178 billion of market value since the stock peaked in 2007 -- equivalent to the value of Bank of America Corp. Yanzhou Coal, the fourth largest, has dropped 80 percent from its 2011 high.
So, in summary, the PBOC had to bailout a 'small' wealth management product due to fears of contagion, which merely amplifies the future problems, and investors are pricing coal companies (which back a vast amount of shadow bank facilities) for major problems ahead... and the PBC had to pump CNY 375 billion in last week just to prop up the banks through the new year...
But apart from that - yeah, China's credit crisis must be over because US equities are up for 3 days...
This Is How The Chinese Economic Disaster Scenario Could Unfold
Chinese policymakers are aware that fueled by credit is unsustainable. To remedy that, they are making efforts to deflate the credit bubble.
This is expected to cause the world's second largest economy to slow modestly in what's been dubbed the soft-landing scenario. In 2013, China grew 7.7%.
But "government efforts to engineer a deleveraging could lead to a hard landing in China, if the policy response is misjudged," writes Societe Generale's Wei Yao.
In this scenario, year-over-year growth could collapse to just 2% and global growth could be cut by up to 1.5% in the year after the hard landing.
Last year, it was believed that inadequate government investment from Beijing or a sharp property market correction prompted by tight policies could trigger a crisis.
Now, Yao expects the crisis could be triggered by tighter liquidity conditions, the crackdown on shadow banking, and more restrictions on local government borrowing.
Here's how the crisis will unfold according to Yao:
Two other events could however trigger a hard landing in China. First, the experience of 2008 showed that China is vulnerable to trade shocks. Exports contracted sharply on the back of the Lehman crisis, resulting in the loss of nearly 50 million migrant worker jobs in the two quarters after it took place.
Second, and more likely, a hard landing could be triggered if well-intended deleveraging gets out of control. Officials clearly want to reduce leverage; the first sign of this was a severe liquidity squeeze in June 2013, partly engineered by policymakers. Rates have dropped since last summer, but liquidity remains tighter than in H1 2013, and credit growth has steadily decelerated, particularly in the shadow banking system.
We expect further policy changes to reduce leverage. In particular, we think the banking regulator will tighten regulations further on shadow bank activities, including products (WMPs) and interbank transactions done by smaller banks to hide corporate loans.
Chinese debt markets have been underpinned by the belief that the central government has the resources, the control and the willingness to stand behind all the debt extended by both the formal and the shadow banking system. Although there have been concerns about , trust products and bank WMPs, there have been no defaults, and investors have always been made whole. To prove that it is serious about deleveraging, however, the central government will have to allow for defaults. Even in our central scenario, we expect some products to default for the first time in 2014.
Here it is in diagram form.