Monday, March 31, 2014

Dismal Japanese data but contradictions from Chinese April 1 , 2014 - as usual -- Japanese Outlook Data Collapses As China's PMI Misses And Beats (And Economy Contracts & Expands)

Schrodinger's Cat

One picture to explain chinese data..........

Second Chinese Bond Company Defaults, First High Yield Bond Issuer

Tyler Durden's picture

In the middle of 2012, to much yield chasing fanfare, China launched a private-placement market for high-yield bonds focusing on China's small and medium companies, that in a liquidity glutted world promptly found a bevy of willing buyers, mostly using other people's money. Less than two years later, the first of many pipers has come demanding payment,when overnight Xuzhou Zhongsen Tonghao New Board Co., a privately held Chinese building materials company, failed to pay interest on high-yield bonds, according to the 21st Century Business Herald.
The company located in the eastern province of Jiangsu, missed the 10 percent coupon payment due March 28 on the notes, which it sold 180 million yuan ($29 million) of last year in a private placement.
As predicted, once Chaori Solar opened the gates for China's default superhighway two months ago, and the realization that China will no longer bail out any and everyone, the default deluge has begun.
“In general, what we will see is a gradual unwinding of implicit government guarantee for a lot of credit products in China,” said James Zhao, chief investment officer in Beijing at the international department of CCB Principal Asset Management Co. “There will continue to be a mixture of bond defaults and too-big-to-fail, or too-entangled, cases. It’s now up to the market to find the pattern and investors will now have to figure out who is creditworthy and who is more likely to fail."

Sino-Capital Guaranty Trust, the guarantor for the Zhongsen Tonghao security, refused to pay on behalf of the company, according to the Guangzhou-based financial newspaper.

A woman who answered the phone at Zhongsen Tonghao and wouldn’t give her name said the company couldn’t immediately comment on the matter. Two calls to Sino-Capital Guaranty Trust went unanswered.

Reluctance to bail out companies that can’t repay debt signals “regulators’ higher tolerance for corporate bond defaults amid financial market reforms, which is in line with the current central administration’s shift to adopt more market-oriented policies,” Moody’s Investors Service said in a report on March 7.

The number of Chinese companies whose debt is double their equity has surged since the global financial crisis, suggesting more defaults may come. Publicly traded non-financial corporates with debt-to-equity ratios exceeding 200 percent have jumped 57 percent since 2007. Chaori Solar may become China’s own “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp.

“SME private bonds are now facing relatively high risk,” said Pengyang’s Yang. “We expect more defaults to come in this area, especially those private enterprises without guarantees.”
We have written extensively about the imminent funding and liquidity threats facing China's real estate developersfollowing the collapse two weeks ago of another closely held company based in neighboring Zhejiang province, property developer Zhejiang Xingrun Real Estate Co. This in turn has sent shockwaves throughout the Chinese housing market, and especially the offshore cash parking version, where recently we have witnessed the start of a mass liquidation wave in Chinese offshore property haven, Hong Kong. However, it now appears that the funding danger is becoming more pervasive than even we expected, and as a result a major adverse risk and rate repricing is imminent.
And while this default came out of the blue, the one we are waiting for is that of the Magic Property which we profiled before:
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.
We can't wait to see the look on Chinese investors" faces when they too learn the term re-re-re-re-rehypothecation.

Japanese Outlook Data Collapses As China's PMI Misses And Beats (And Economy Contracts & Expands)

Tyler Durden's picture

Another night, another disaster for Abe. Japan's all-important Tankan Business conditions forecast dropped to a one-year low and missed by the most since Lehman (but apart from that Abenomics is "nailing it").  China's "official" Manufacturing PMI beat expectations modestly and printed at a stimulus-busting 50.3 (expanding) as imports and new export orders jumped rather cough-notably-cough given external conditions and all other economic data. Rather remarkably, the New Order sub index of the Steel Industry PMI report showed a huge surge from 32.4 to 46.1 as New Export orders tumbled - this is the biggest jump in new Steel orders in.. well as far back as we have data...Then HSBC's PMI hit. Printing at 48.0 - worse than the flash print at 48.1 and still firmly in contraction territory leaving China once again in Schrodinger baffle 'em with bullshit economic growth mode.

Japan's Tankan Large Enterprise Busines Outlook Survey is losing its hope...

Then China followed up with the ubiquitous Schrodinger economy with the official PMI data beating expectations and showing an improved expansion while HSBC's manufacturing PMI (broader-based survey of less SOEs) remained firmly in contraction territory... and worse than the Flash data!!

So HSBC lowest in 8 months and missed and Official highest in 3 months and beat - Stimulus or no?

And aside from in the inflationary pressure in Japan, data is a disaster and stimulus hopes are renewed as terrible news is great news... And don't worry about the JGBs dumping on inflation concerns...
And China stimulus hopes appear dashed for now with official stats showing "improvement"...
Day after day Japanese data has been missing expectations (and is dismissed as the storm before the calm), US data has been missing expectations (all the weather, don't worry), and European data has flatlined for 5 months (amid calls for a great recovery or new QE). But, what is keeping the dream alive for stock investors all over the world is another region that is expressly set on tightening credit and instilling "moral hazard destroying" reforms. One look at the following chart ofChina's macro data (at 5 year lows) and the howls of optimism will grow loud as stimulus must come any minute, right?... except, as we noted previously, it won't(unless things get a lot worse).
Just how bad is China?

We suspect, for Xi and his merry men, this bad news will remain bad news as any retracement on their promised reforms so soon after the Plenum would be a disaster and would risk an even bigger correction down the road (a lesson they are learning from the Americans very well).

BofA believes that there are structural and cyclical factors at play in China's weakness and that the authorities will be more inclined to deal with the cyclical than the structural for now - the contractionary fiscal drag of the anti-corruption reform.
We believe the major drag is the contractionary fiscal policy as a consequence of Beijing's anti-corruption and anti-vice campaign which was started at the beginning of last year and was significantly escalated this year. The strong evidence was the abnormally high growth of bank deposits of governments and quasi-government agencies (up 28.3% and 23.6% yoy in February 2014 respectively), a significant slowdown in retail sales growth, and some deceleration in FAI growth. 
We believe China should continue its anti-corruption campaign and should even take further long-term institution-building measures to more effectively prevent corruption. But the government, just like all other governments in the world, also holds the responsibility in delivering stable growth and full employment in the short-term. How can Beijing reconcile the innate conflicts between the anti-corruption campaign and stable economic growth? In our view, Beijing could reverse the contractionary fiscal policy to some extent by spending the extra government savings on social welfare projects such as social housing, health care, urban infrastructure and infrastructure projects in Western areas.
To be sure, we don't expect a big fiscal stimulus

Our discussions above do not mean that we expect a big stimulus. Actually we think the government needs to recognize the major factors behind the economic slowdown and could come up with appropriate offsetting measures to arrest the slowdown (at least the cyclical part). Unlike the case in the US in 2013, it's hard to measure the exact scale of China's "fiscal cliff", but we can at least get a rough estimate (around 60-150bp, in our view), the cyclical slowdown now is quite clear, and Beijing can experiment with some incremental spending from its own coffers to boost both demand and confidence.
Looking beyond the technical drivers, we expect PBOC will keep liquidity relatively ample and stabilize interbank rates to support growth and smooth corporate financing costs. In terms of RRR, we believe the PBoC will eventually cut the too high RRR, but at the moment we think the chance for a cut is still low.