Wednesday, March 19, 2014

China update March 19 , 2014 -- Dropping Like Flies: Largest Steel Maker In China's Shanxi Province Defaults On CNY 3 Billion In Debt , South China Futures Brokerage Co announces closure on major operation riskes ......The Chinese Yuan Is Collapsing and the wealthy are cashing out offshore luxury homes for cash .....



Dropping Like Flies: Largest Steel Maker In China's Shanxi Province Defaults On CNY 3 Billion In Debt

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When we started discussing the upcoming onslaught of corporate defaults in "Minsky Moment" China, now that the bankruptcy seal has been broken, we warned that the worst is about to come.
Well, it's coming.
Overnight, Hong Kong's The Standard reported that in addition to the solar, coal and real-estate developer companies that are on everyone's radar as potential future bankruptcy candidates, one can also add steel makers to the list, with its report that Highsee Group, the largest private steel makers in Shanxi province has defaulted on CNY3 billion of debt, unable to repay its bonds on time.
According to The Standard, "Highsee Group's 3 billion yuan debt was overdue last week," the 21st Century Business Herald reported yesterday. "The company is running in red, and has failed to pay workers for months. Many of its furnaces have stopped operating."
The reason for this most recent collapse: the plunge of domestic steel prices , which have fallen to their lowest level in more than eight years in mid-March as a result of weak demand and a surge in output.
Earlier, Shanxi coal miner Liansheng Resources Group went bankrupt while its loans, which were packaged into a wealth management product distributed by China Construction Bank (0939), are likely to be bailed out. UBS Securities securities analyst Chen Li said it is the peak season for corporate debt dues. Up to 80 percent of the nation's trusts have obligations to meet within the second quarter, he added.
It remains to be seen if Highsee is bailed out, however now that pretty much any corporation with exposure to the commodity and real estate space that has maturing debt is on the rocks, the PBOC may be better suited just to let the system cleanse itself, even if that means the collapse in both the Chinese stock market, which unlike the US is largely irrelevant (especially since it once again dropped below 2000 while the Hang Seng entered a bear market), but the bigger issue is that the Chinese housing bubble is set to burst both domestically and abroad, as we reported yesterday.
And lest readers are left with the impression that merely operational companies with direct exposure to the deleveraging carnage that is taking place in China - at least until such time as China unleashes another multi-trillion stimulus - are exposed, also overnight financial firm South China Futures announced it is terminating it business on "major operation risks."
About South China Futures Brokerage Co. closure announcement

As the Company has significant business risks, some of the bank account was frozen Guizhou Court of Justice, in order to protect the legitimate rights and interests of investors, the company passed a resolution to stop the shareholders' meeting brokerage business futures, now specific announcement is as follows:

First, the announcement issued by the date, the South China Futures Brokerage Co., Ltd. (hereinafter referred to as "the South China Futures") is no longer accepting new customers open positions instructions.

Second, within five working days of the date of this announcement, make customers to handle the South China Futures cancellation procedures.

Third, the five working days after the publication of the notice, did not apply for cancellation procedures futures customer account funds will be transferred to the unified Huatai Great Wall Futures Co., Ltd. (hereinafter referred to as "Huatai Great Wall Futures").

Fourth, since the date of this announcement within ten working days from customers willing to open an account at Huatai Great Wall Futures, futures and South China Huatai Great Wall Futures will jointly provide customers with convenient handle channel, during the South China Huatai Great Wall Futures futures and customer acceptance , Tel: South Futures, (020) 38791617(020) 38791617 ; Huatai Great Wall Futures, 4006280888.

Notice is hereby given.
Dropping like flies now.
We wonder how long until the US stock market, floating in its cloud of manipulated, centrally-planned oblivious innocence, realizes that a China on the verge of all out deflationary recession is not a good thing?





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Dollar Surges, Chinese Yuan Plunges In FOMC Aftermath


In the aftermath of yesterday's key market event, the FOMC's $10 billion tapering and elimination of QE with "QualG", not to mention the "dots" and the 6 month period, the USD has been on fire against all key pairs, with the EURUSD sliding below 1.38, a 150 pip move in one day which should at least give Mario Draghi some comfort, but more importantly sending the USDJPY soaring to 102.500 even as US equity futures, and not to mention the Nikkei which tumbled -1.7% to just above 14,000 overnight. Perhaps the biggest take home message for traders from yesterday is that the Yen carry trade correlation to the Emini is now dead. Of course, the other big news overnight was the plunge in the Yuan, tumbling 0.5%, 6.2286, up 343 pips and crushing countless speculators now that the "max vega" point has been passed. Expect under the radar news about insolvent trading desks over the next few days, as numerous mega levered FX traders, who had bet on continued CNY appreciation are quietly carted out the back door. Elsewhere, gold and other commodities continue to be hit on rising fear the plunging CNY will accelerate the unwind of Chinese Commodity Funding Deals.














The Chinese Yuan Is Collapsing

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The Yuan has weakened over 250 pips in early China trading. Trading at almost 6.22, we are now deeply into the significant-loss-realizing region of the world's carry-traders and Chinese over-hedgersMorgan Stanley estimates a minimum $4.8bn loss for each 100 pip move. However, the bigger picture is considerably worse as the vicious circle of desperate liquidity needs are starting to gang up on Hong Kong real estate andcommodity prices. For those who see the silver lining in this and construe all this as a reason to buy more developed world stocks on the premise that the money flooding out of China (et al.) will be parked in the S&P are overlooking the fact that the purchase price of these now-unwanted positions was most likely borrowed, meaning that their liquidation will also extinguish the associated credit, not re-allocate it.

While widening the trading bands keeps some semblance of rationality, this is anything but an orderly unwind of the world's largest carry trades:
For some context, this is the biggest quarterly drop in CNY since Q4 1993...


How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.
Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.

Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.

In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires.Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.

Below we have tried to simplify what is happening as much as possible... (since there are many pathways into and out of all of these positions) to try and enable most to comprehend the problem
Virtuous circle... (last few years)
  • Specs sell USD/JPY/EUR, Buy CNY
  • Use CNY to buy copper/commodities
  • Use copper to finance credit
  • Use credit to finance working capital/real estate purchases
  • Real estate goes up, more credit available
  • Copper goes up, more credit available
  • encourages more buying CNY to start virtuous circle...
BUT what happens when one of these chains start to break? OR ALL OF THEM? (now!)
  • Thanks to PBOC, can't roll debt via shadow banking system
  • Can't rely on local govt to bail out cashflow
  • Sell copper/commodities to meet cashflow needs
  • Copper price goes down, credit tightens
  • Credit tightens, Real estate prices drop
  • Real estate prices drop, specs start exiting CNY
  • CNY weakens...
And then... (tomorrow)
  • Plenty more firms piled on to use the inexorable trend in CNY strengthening as their carry-trade piggy bank (or merely to hedge their export receipts)...
  • Those derivative (over-hedges) are now losing money very rapidly...
  • Liquidate hedges - downward pressure on CNY
  • downward pressure on CNY, more losses...
Remember carry-traders are little more than sophisticated leveraged momentum players - so when the trend is no longer your friend, no amount of carry-arbitrage will cover MtM losses on the notional...

Arguing that the PBOC can defend the currency is moot (they clearly do not wish to); Arguing that the PBOC will manage liquidity via their huge FX reserves is moot (they have done so with the banks - who are awash with liquidity as noted by the low repo rates) - this is about forcing the shadow-banking system to shrink before the bubble becomes totally untenable... unfortunately, we suspect it already has...
Oh dear, remember the Chinese corporation that untenably insolvent but "promised" it would meet interest payments in July and not default... well:
  • *BAODING TIANWEI BOND TRADING SUSPENDED BY SHANGHAI EXCHANGE
Uh oh...
All the carry-funded idiocy of the world is starting to uwind

As the world slowly realizes the Fed's growing hawkishness (what are they afraid of? or do they really believe that the economy is growing organically?)




The Music Just Ended: "Wealthy" Chinese Are Liquidating Offshore Luxury Homes In Scramble For Cash

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One of the primary drivers of the real estate bubble in the past several years, particularly in the ultra-luxury segment, were megawealthy Chinese buyers, seeking to park their cash into the safety of offshore real estate where it was deemed inaccessible to mainland regulators and overseers, tracking just where the Chinese record credit bubble would end up. Some, such as us, called it "hot money laundering", and together with foreclosure stuffing and institutional flipping (of rental units and otherwise), we said this was the third leg of the recent US housing bubble. However, while the impact of Chinese buying in the US has been tangible, it has paled in comparison with the epic Chinese buying frenzy in other offshore metropolitan centers like London and Hong Kong. This is understandable: after all as Chuck Prince famously said in 2007, just before the first US mega-bubble burst, "as long as the music is playing, you've got to get up and dance." In China, the music just ended.
But more so than mere analyses which speculate on the true state of the Chinese record credit-fueled economy, such as the one we posted earlier today in which Morgan Stanley noted thatChina's "Minsky Moment" has finally arrived, we now can judge them by their actions.
And sure enough, it didn't take long before the debris from China's sharp, sudden attempt to "realign" its runaway credit bubble, including the first ever corporate bond default earlier this month, floated right back to the surface.
Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.
Said otherwise, what goes up is now rapidly coming down.
Wealthy Chinese were blamed for pushing up property prices in the former British territory, where they accounted for 43 percent of new luxury home sales in the third quarter of 2012, before a tax hike on foreign buyers was announced.

The rush to sell coincides with a forecast 10 percent drop in property prices this year as the tax increase and rising borrowing costs cool demand. At the same time, credit conditions in China have tightened. Earlier this week, the looming bankruptcy of a Chinese property developer owing 3.5 billion yuan ($565.25 million) heightened concerns that financial risk was spreading.

"Some of the mainland sellers have liquidity issues - say, their companies in China have some difficulties - so they sold the houses to get cash," said Norton Ng, account manager at a Centaline Property real estate office close to the China border, where luxury houses costing up to HK$30 million ($3.9 million) have been popular with mainland buyers.
Alas, as the recent events in China, chronicled in minute detail here have revealed, the "liquidity issues" of the mainland sellers are about to go from bad to much worse. As for Hong Kong, it may have been last said so long ago nobody even remembers the origins of the word but, suddenly, it is now a seller's market:
Property agents saidmainland Chinese own close to a third of the existing homes that are now for sale in Hong Kong - up 20 percent from a year ago. Many are offering discounts of 5-10 percent below the market average -and in some cases as much as 20 percent - to make a quick sale, property agents and analysts said.
Also known as a liquidation. And like every game theoretical outcome, he who defects first, or in this case sells, first, sells best. In fact, since panicked selling will only beget more selling, watch as prices suddenly plunge in what was until recently one of the most overvalued property markets in the world. And with prices still at nosebleed levels, not even BlackRock would be able to be a large enough bid to absorb all the slamming offers as suddenly everyone rushes to cash out.
The biggest irony: after creating ghost towns at home, the Chinese "uber wealthy" army is doing so abroad.
In a Hong Kong housing development called Valais, about 10 minutes drive from the Chinese border, real estate agents said that between a quarter and a half of the 330 houses are now on sale. At the development's frenzied debut in 2010, a third of the HK$30-HK$66 million units were sold on the first day, with nearly half going to mainland China buyers.

Dubbed a "ghost town" by local media, the development built by the city's largest developer, Sun Hung Kai Properties Ltd (0016.HK), is one of many estates in Hong Kong where agents are seeing an increasing number of Chinese eager to sell.

"Many mainland buyers bought lots of properties in Hong Kong when the market was red-hot three years ago," said Joseph Tsang, managing director at Jones Lang LaSalle. "But now they want to cash in as liquidity is quite tight in the mainland."
Perhaps our post from yesterdaychronicling the crash of the Chinese property developer market was on to something. And of course, as also described in detail, should China'sZhejiang Xingrun not be bailed out, as the PBOC sternly refuted it would do on Weibo, watch as the intermediary firms themselves shutter all credit, and bring the Chinese property market, both domestic and foreign, to a grinding halt (something he highlighted in our chart of the day).
Meanwhile, the selling rush is on.
In a nearby development called The Green - developed by China Overseas Land & Investment (0688.HK) - about one-fifth of the houses delivered at the start of this year are up for sale.More than half of the units, bought for between HK$18 million and HK$60 million, were snapped up by mainland Chinese in 2012.
Because so much changes in just over a year.
"Some banks were chasing them (Chinese landlords) for money, so they need to move some cash back to the mainland," said Ricky Poon, executive director of residential sales at Colliers International. "They're under greater pressure from banks, so they're cutting prices."

In West Kowloon district, an area where mainland Chinese bought up close to a quarter of the apartments in many newly-developed estates, some Chinese landlords are offering discounts on the higher-end, three- to four-bedroom apartments they bought just a few years ago.

This month, a Chinese landlord sold a 1,300 square foot (121 square meter) apartment at the Imperial Cullinan - a high-end estate developed by Sun Hung Kai in 2012 - for HK$19.3 million, 17 percent less than the original price. The landlord told agents to sell the flat "as soon as possible," said Richard Chan, branch manager at Centaline Property in West Kowloon.

In the same area, a 645 square foot, 2-bedroom flat in the Central Park development was sold in just two days after the Chinese owner put it on the market at HK$6.5 million in what agents called the year's best bargain - the cheapest price for a unit of its kind over the past year.
Don't worry there will be many more bargains. Why? Because what was once a buying panic - as recently as months ago - has finally shifted to its logical conclusion. Selling.
"The most important thing for them is to sell as soon as possible," Centaline's Chan said. "In the past two weeks, those who were willing to cut prices were mainland Chinese. It is going to have some impact on the local property market, that's for sure."
Indeed. And once the Hong Kong liquidation frenzy is over, and leaves the city in a state of shock, watch as the great Chinese selling horde stampedes from Los Angeles, to New York, to London, Zurich and Geneva, and leave not a single 50% off sign in its wake.
The good news? All those inaccessibly priced houses that were solely the stratospheric domain of the ultra-high net worth oligarch and criminal jet set, will soon be available to the general public. Especially once the global housing bubble pops, which may have just happened.