China financial strains emerging - March 17 , 2014 ......The Second Chinese Corporate Default: Real Estate Developer With CNY3.5 Billion In Debt Collapses , Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank Corp. (939) holding more than 1 billion yuan of its debt, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. The company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said.

http://www.zerohedge.com/news/2014-03-17/second-chinese-corporate-default-real-estate-developer-cny35-billion-debt-collapses

The Second Chinese Corporate Default: Real Estate Developer With CNY3.5 Billion In Debt Collapses

Submitted by Tyler Durden on 03/17/2014 08:28 -0400

• Bond
 
• China
 
• Copper
 
• Creditors
 
• default
• Newspaper
 
• Nomura
 
• Real estate
 
• Yuan

inShare

 

A few days ago, copper prices and the Chinese stock market were roiled by speculation that another - the second in a row - Chinese bond default may be imminent, in the shape of Baoding Tianwei Baobian Electric (TBE) a maker of electrical equipment and solar panels, whose bonds and stock were suspended from trading a week ago after reporting massive losses. A few days later, TBE "promised" not to default when its next interest payment is due in July (although how the insolvent company can see that far into the future is just a little confusing). And yet the market shrugged and contrary to its recent idiotic euphoria to surge on even the tiniest of non-horrible news, barely saw a rise. Today we may know the reason:overnight Bloomberg reports that second Chinese corporate bond default may be imminent after the collapse and arrest of the largest shareholder of closely held Chinese real estate developer Zhejiang Xingrun Real Estate Co, which just happens to be saddled with 3.5 billion yuan ($566.6 million) of debt.

Debt which absent a bailout, which at this point is very improbable, will not be repaid.

From Bloomberg:

Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank Corp. (939) holding more than 1 billion yuan of its debt, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. The company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said.

What is curious about this particular potential default is that it touches not only on the massive leverage in the Chinese system, but on the one real bubble in China (since nobody there seems to care about the Shanghai Composite): housing.

The collapse of the company, in the eastern town of Fenghua, adds to concern of strains in China’s real estate sector. The property market in smaller Chinese cities faces “true risks of a sharp correction” due to oversupply and investors may have underestimated the risk, Nomura Holdings Inc. economists said in a March 14 report.

Two calls to the chairman’s office and financial department at Zhejiang Xingrun weren’t answered today. A woman who answered the phone at the Fenghua government’s news office who declined to give her name confirmed the company cannot pay its debt. A Beijing-based press officer at CCB said the bank asked for more information from its local branch about the report and hasn’t heard back.

So going back to the collapse, Bloomberg adds that the failure of the company was reported earlier today by the Chinese-language National Business Daily, which cited an unidentified government official for the news. The report blamed the failure on mismanagement and high costs of private lending, according to the newspaper.

“We think the default of the developer will alert the banks on escalating risk from developers amid the liquidity tightening,” said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research. “We maintain our view that banks may revisit loan policy on property and may take stricter stance on property development loans, particularly for small developers.”

It is also about to get worse: "Property shares slid to a 16-month low in February after Industrial Bank Co. suspended mezzanine financing for developers, adding to concerns that smaller developers may default on their borrowings amid the government’s property curbs and an economic slowdown."

And just like that, quite suddenly, the tide is flowing out and all those swimming naked will be revealed. What happens next? Precisely what we said would happen a week ago, when we explained the imminent plight of Chinese corporate where things such as this are about to be revealed...

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.

... as having taken place at a truly massive scale.

The refresher........

http://www.zerohedge.com/news/2014-03-11/magic-collateral-frank-look-sheer-credit-horror-about-be-unleashed-china

"Magic" Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China

Submitted by Tyler Durden on 03/11/2014 12:54 -0400

• Bank of America
 
• Bank of America
 
• Bond
 
• China
• default
 
• MF Global
 
• Reality

inShare17

 

While the world is terrified about what China - where corporate bond defaults are now permitted - may be about to unleash on the world, most are all too happy to remain in a state of delightful ignorance.We decided to take a peek behind the scenes.

Recall that as we have repeatedly shown in the calendar of coming Chinese bond default, on March 31, a borrower named "Magic" (no comment) is set to default on a CNY196 million Trust.

The default may or may not happen, as there is always a high likelihood it will simply be bailed out as has happened frequently in the past, but regardless of the final outcome, here is what is reallygoing on behind the scenes. From Bank of America:

31 Mar 2014, Rmb196mn borrowed by Magic Property & arranged by CITIC Trust

Details: invested in an office building in Chongqing. The Chongqing developer ran into financial problems in mid-2013. 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.

Potential outcome: The developer and the trust company may share the repayment.

Reasons: 1) When CITIC Trust sold the product, it did not specify the underlying investment project. 2) The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.

Please re-read that first part again:

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.

So, "Magic" not only sold the collateral... but also mortgaged it to a few other lenders: lenders who count its as a perfectly performing asset when in reality they have zero claims to it. Did they steal that straight from the MF Global instruction manual?

Now add this:

"The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer."

... and multiply by a few thousand for all the other shadow (and not so shadow) players who have engaged in precisely this kind of gross abuse of underlying collateral, which also happens to be the main reason why China can magically create trillions in debt out of thin air with zero collateral constraints, each and every year, no questions asked.

Well, the time to ask a question or two has finally arrived.