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Chinese Onshore Defaults On Pace For Another Record Year In 2019
by: Adem Tumerkan
https://speculatorsanonymous.com/articles/chinese-onshore-defaults-2019/
Getting right to it. . .
Two months ago &ndash I wrote about the record-breaking onshore defaults that have plagued corporate China in 2018.
And &ndash further &ndash I hypothesized that this trend will continue over the next year.
(You can read that article here if you haven&rsquo t yet &ndash I even disclosed how I was personally playing the wave of coming defaults).
Now &ndash only a few months into 2019 &ndash and things are looking dire in corporate China.
Let me explain. . .
Thus far &ndash 2019&rsquo s shaping up as another record year for Chinese corporate defaults.
To give you some perspective &ndash in just the first four months of this year &ndash Chinese firms have defaulted on roughly 40 billion in yuan ($5.8 billion USD) worth of domestic bonds.
And &ndash according to Bloomberg &ndash that&rsquo s 350% more than during the same period last year.
Making matters worse &ndash many of these defaults are large Chinese firms. And some are even going right into bankruptcy.
For instance &ndash four huge private firms in Shandong (China&rsquo s third wealthiest province) have filed bankruptcy over the last few months.
Other firms haven&rsquo t out-right declared bankruptcy &ndash but are already behind many billions in missed bond-payments.
For example &ndash Neoglory Holding Group (a property investment conglomerate) has missed payments of seven-billion-yuan so far in 2019. (And this comes after they missed repaying interest and principle to bond holders in September 2018).
Another example &ndash Citic Guoan Group Company (which has interests ranging from financial investments to the property markets) defaulted on three-billion-yuan worth of bonds last month. And has at least another 15-billion-yuan worth of onshore bonds outstanding that are maturing.
It&rsquo s clear that unless anything substantially changes &ndash the trend&rsquo s set for another record-year of defaults throughout China.
But after the recent trade-deal breakdown &ndash and increased tariffs &ndash I think things will be much worse than the mainstream expects.
You see &ndash China&rsquo s stuck between a rock-and-hard-place. . .
On the one side &ndash Chinese firms are suffering softer sales and slowing growth. This is crippling their ability to repay maturing bonds.
And on the other side &ndash Chinese firms are feeling the effects of the Federal Reserve&rsquo s tightening (and a stronger U.S. dollar).
They&rsquo re having difficulty refinancing and repaying dollar-debts (of which there&rsquo s $2.25 trillion that Chinese firms owe over the next 30 months).
Thus &ndash the Chinese government has repeatedly pressed banks to extend credit to private domestic corporations (specifically small-and-medium sized firms).
But the problem here is &ndash most debt is denominated in U.S. dollars
Meaning &ndash Chinese firms need U.S. dollars to repay their loans.
But &ndash like I wrote about a couple weeks ago &ndash Chinese banks are suffering their own dollar-shortage.
Take a look at the combined dollar-liabilities of China&rsquo s four largest commercial banks. . .
First &ndash it was Chinese firms that were short on dollars-assets compared to dollar-liabilities.
Now &ndash major Chinese banks are short on dollar-assets compared to dollar-liabilities.
What&rsquo s next? Will we see Chinese banks begin to default?
I wouldn&rsquo t be surprised. . .
For instance &ndash two weeks ago &ndash China Minsheng Investment Group (a private equity investment firm) defaulted on dollar-debts worth $800 million &ndash with $300 million of that debt guaranteed by China Construction Bank.
And so far &ndash investors remain confident that the bank will honor that $300 million dollar-debt.
But &ndash with Chinese banks already drained of dollar-assets &ndash they can&rsquo t afford to be stuck paying all these corporate defaults.
And eventually &ndash the market will begin to notice. . .
The current situation in China has a striking similarity to what Japan dealt with in the 1990&rsquo s &ndash when overly-inflated asset bubbles (which were pumped up by years of cheap debt) began collapsing.
Unfortunately &ndash like Japan learned &ndash the further the asset side sinks, the more difficult the liabilities side becomes to deal with.
(Eventually &ndash Japanese banks suffered credit rating downgrades and found it difficult to raise dollars from overseas to refinance massive loans which turned into non-performing assets).
So &ndash in summary &ndash I expect further stress in corporate China. Especially as the yuan weakens (making it difficult to repay dollar-debts).
This stress will effect the Chinese banking sector &ndash which is reaching a &lsquo tipping-point&rsquo &ndash and make the system highly fragile.
Eventually &ndash the grossly indebted Chinese economy will deflate &ndash showing how horrible the malinvestment was over the years of cheap money.
According to Hyman Minsky&rsquo s Financial Instability Hypothesis (FIH) &ndash the Chinese economy is in the &lsquo Ponzi Stage&rsquo .
This is the last stage in the bubble. When debtor cash-flows can&rsquo t cover interest payments or repay the principle due &ndash and soon must liquidate assets &ndash causing prices to collapse.
Maybe next time, more will understand that &ldquo the bigger the boom, the bigger the eventual bust.&rdquo
https://speculatorsanonymous.com/articles/chinese-onshore-defaults-2019/
Getting right to it. . .
Two months ago &ndash I wrote about the record-breaking onshore defaults that have plagued corporate China in 2018.
And &ndash further &ndash I hypothesized that this trend will continue over the next year.
(You can read that article here if you haven&rsquo t yet &ndash I even disclosed how I was personally playing the wave of coming defaults).
Now &ndash only a few months into 2019 &ndash and things are looking dire in corporate China.
Let me explain. . .
Thus far &ndash 2019&rsquo s shaping up as another record year for Chinese corporate defaults.
To give you some perspective &ndash in just the first four months of this year &ndash Chinese firms have defaulted on roughly 40 billion in yuan ($5.8 billion USD) worth of domestic bonds.
And &ndash according to Bloomberg &ndash that&rsquo s 350% more than during the same period last year.
Making matters worse &ndash many of these defaults are large Chinese firms. And some are even going right into bankruptcy.
For instance &ndash four huge private firms in Shandong (China&rsquo s third wealthiest province) have filed bankruptcy over the last few months.
Other firms haven&rsquo t out-right declared bankruptcy &ndash but are already behind many billions in missed bond-payments.
For example &ndash Neoglory Holding Group (a property investment conglomerate) has missed payments of seven-billion-yuan so far in 2019. (And this comes after they missed repaying interest and principle to bond holders in September 2018).
Another example &ndash Citic Guoan Group Company (which has interests ranging from financial investments to the property markets) defaulted on three-billion-yuan worth of bonds last month. And has at least another 15-billion-yuan worth of onshore bonds outstanding that are maturing.
It&rsquo s clear that unless anything substantially changes &ndash the trend&rsquo s set for another record-year of defaults throughout China.
But after the recent trade-deal breakdown &ndash and increased tariffs &ndash I think things will be much worse than the mainstream expects.
You see &ndash China&rsquo s stuck between a rock-and-hard-place. . .
On the one side &ndash Chinese firms are suffering softer sales and slowing growth. This is crippling their ability to repay maturing bonds.
And on the other side &ndash Chinese firms are feeling the effects of the Federal Reserve&rsquo s tightening (and a stronger U.S. dollar).
They&rsquo re having difficulty refinancing and repaying dollar-debts (of which there&rsquo s $2.25 trillion that Chinese firms owe over the next 30 months).
Thus &ndash the Chinese government has repeatedly pressed banks to extend credit to private domestic corporations (specifically small-and-medium sized firms).
But the problem here is &ndash most debt is denominated in U.S. dollars
Meaning &ndash Chinese firms need U.S. dollars to repay their loans.
But &ndash like I wrote about a couple weeks ago &ndash Chinese banks are suffering their own dollar-shortage.
Take a look at the combined dollar-liabilities of China&rsquo s four largest commercial banks. . .
First &ndash it was Chinese firms that were short on dollars-assets compared to dollar-liabilities.
Now &ndash major Chinese banks are short on dollar-assets compared to dollar-liabilities.
What&rsquo s next? Will we see Chinese banks begin to default?
I wouldn&rsquo t be surprised. . .
For instance &ndash two weeks ago &ndash China Minsheng Investment Group (a private equity investment firm) defaulted on dollar-debts worth $800 million &ndash with $300 million of that debt guaranteed by China Construction Bank.
And so far &ndash investors remain confident that the bank will honor that $300 million dollar-debt.
But &ndash with Chinese banks already drained of dollar-assets &ndash they can&rsquo t afford to be stuck paying all these corporate defaults.
And eventually &ndash the market will begin to notice. . .
The current situation in China has a striking similarity to what Japan dealt with in the 1990&rsquo s &ndash when overly-inflated asset bubbles (which were pumped up by years of cheap debt) began collapsing.
Unfortunately &ndash like Japan learned &ndash the further the asset side sinks, the more difficult the liabilities side becomes to deal with.
(Eventually &ndash Japanese banks suffered credit rating downgrades and found it difficult to raise dollars from overseas to refinance massive loans which turned into non-performing assets).
So &ndash in summary &ndash I expect further stress in corporate China. Especially as the yuan weakens (making it difficult to repay dollar-debts).
This stress will effect the Chinese banking sector &ndash which is reaching a &lsquo tipping-point&rsquo &ndash and make the system highly fragile.
Eventually &ndash the grossly indebted Chinese economy will deflate &ndash showing how horrible the malinvestment was over the years of cheap money.
According to Hyman Minsky&rsquo s Financial Instability Hypothesis (FIH) &ndash the Chinese economy is in the &lsquo Ponzi Stage&rsquo .
This is the last stage in the bubble. When debtor cash-flows can&rsquo t cover interest payments or repay the principle due &ndash and soon must liquidate assets &ndash causing prices to collapse.
Maybe next time, more will understand that &ldquo the bigger the boom, the bigger the eventual bust.&rdquo
What is the 25% increase in tariff going to do to the Chinese Companies?......Biz sentiment...........consumer sentiments............... How will our bank be affected? 