Tag: china

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Is China Beginning To Collapse?

I have been warning on China for at least a few years.  Today, China’s “Grow At Any Cost” policy is starting to unravel.  Earlier today Chinese stocks took a 2-3% hit, CSI 300 Index hit a five year low, the Yuan fell 0.2%  and overseas shipments plunged 18.1% (vs +7.5% estimate). 

Cracks in the foundation or beginning of a collapse? 

Both. Listen, China is unlikely to collapse or unravel within a short period of time. Whatever happens will take a considerable amount of time due to massive Government interference. To see how long, we must once again look towards the US Stock Market & Economy. The bear market and recession of 2014-2017 will take 3 years to complete. During that time Chinese exports are bound to slow down even more. In addition, with anticipated credit market blow ups it is unlikely China will be able to continue to expand it’s credit at break neck speeds of the last few years. Indicating a further slowdown and a subsequent collapse. 

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Bloomber Reports: China’s CSI 300 Plunges to Five-Year Low on Export Slump :

China’s CSI 300 Index (SHSZ300)plunged to the lowest level in five years and the yuan weakened as an unexpected drop in exports spurred concern that the world’s second-largest economy is slowing.

The index of the largest Chinese stocks slid 3.3 percent to 2,097.79 at the close, the lowest since February 2009, while the Shanghai Composite Index tumbled 2.9 percent, the most since June. The yuan fell 0.2 percent to 6.1385 per dollar. Money-market rates slumped to a 21-month low amid speculation demand for cash is diminishing as economic growth weakens.

Overseas shipments plunged 18.1 percent in February, compared with analysts’ median estimate for a 7.5 percent increase, as distortions from the Lunar New Year holiday made forecasting more difficult. Investors are looking for policy guidance from this month’s National People’s Congress in Beijing amid concerns over slowing growth, a flood of new share sales and geopolitical tension between Russia and Ukraine.

“There’s a slew of bad news today — lousy economic data, IPOs may be restarting, the policy meeting is ending soon with no surprises and the Ukraine situation isn’t helping,” said Xu Shengjun, an analyst at Jianghai Securities Co. in Shanghai. “The market is being dragged down by all these factors, I don’t see any positive stories today.”

Growth Target

Jiangxi Copper Co. led declines for material producers, slumping 5.8 percent as copper prices on the Shanghai exchange plunged by the 5 percent daily limit. China is the biggest consumer of commodities from copper to iron ore and rubber.

Poly Real Estate Group Co. tumbled 4.8 percent after the developer reported a 8.4 percent drop in sales for last month. A weaker yuan is boosting dollar borrowing costs for Chinese developers already grappling with a domestic property-market crackdown and slowing sales.

The drop in exports highlights the challenges for Premier Li Keqiang in achieving this year’s economic growth target of 7.5 percent. Li announced the goal last week at the opening of the annual meeting of the NPC, a pace unchanged from last year. Imports rose 10.1 percent from a year earlier, leaving a trade deficit of $23 billion, the biggest in two years.

China’s consumer price index rose 2 percent in February from a year earlier, the smallest gain in 13 months, data from the National Bureau of Statistics showed yesterday. Producer prices (CHEFTYOY) fell 2 percent, the most since July.

Cheapest Valuation

“The inflation and PPI numbers signal a lack of demand from consumers and industries, while the export number is way below expectations even after discounting the Chinese New Year effect, so investors are concerned,” said Du Liang, an analyst at Shanxi Securities Co. in Beijing. “I reckon the sell-off will get some support at the 2,000 level” on the Shanghai Composite index, which closed at 1,999.07 today.

The CSI 300 trades at 7.7 times projected 12-month earnings, the lowest level since at least 2007, according to data compiled by Bloomberg. Today’s tumble is the biggest since a cash crunch in China’s interbank market dragged down the index by 6.3 percent on June 24. The gauge slipped another 0.5 percent in the following three days, then rallied as much as 16 percent through mid-September.

The Hang Seng China Enterprises Index (HSCEI) fell 1.8 percent, dragged down by a 4 percent loss for Anhui Conch Cement Co. The Bloomberg China-US Equity Index slid 1.3 percent on March 7.

The yuan has weakened about 1.4 percent in 2014. The People’s Bank of China lowered the dailyreference rate by 0.18 percent, the most since July 2012, to 6.1312 per dollar today.

The cut in the yuan fixing “is significant, coming on the heels of poor trade data, and suggests a possible policy push to weaken the yuan to help exporters,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This would mean rising risks to more downside.”

Repo Rate

The seven-day repurchase rate, a gauge of funding availability in the banking system, fell 12 basis points to 2.30 percent, according to a fixing published by the National Interbank Funding Center. A one-year rate swap that exchanges fixed payments for the floating seven-day repo dropped as much as 15 basis points to a four-month low of 4.26 percent, data compiled by Bloomberg show.

Slowing inflation may give leaders more space to support growth if needed as they gauge the effects of the nation’s first onshore corporate-bond default.

Shanghai Chaori Solar Energy Science & Technology Co., a solar-cell maker, said March 7 it wasn’t able to make an interest payment due that day in full, providing the first default in China’s onshore bond market. Chaori’s experience may be a sign the government is backing off from its practice of bailing out companies with bad debt.

More Defaults

China should allow companies to default on their bonds, an external supervisor at the Bank of China said March 8.

“We need to be more accepting and allow such defaults to happen,” Mei Xingbao told reporters during a meeting of the Chinese People’s Consultative Conference in Beijing. “The debtor must be responsible for his own debt. He must tell the investors that there is risk involved in the product.”

China Southern Airlines Co. slid more than 3 percent in Shanghai and Hong Kong trading after the carrier said it sold seven tickets for the Malaysian Airline System Bhd. flight that has gone missing.

Malaysia stepped up efforts to locate the jet that may have crashed in the Gulf of Thailand with 239 people on board, focusing on oil slicks. The prospect of terrorism arose after Austria andItaly said passports used by two male passengers were stolen from their citizens. The flight was a codeshare with China Southern.

BlackRock Hire

BlackRock Inc. named Helen Zhu as head of China equities, luring the strategist away from Goldman Sachs Group Inc. to increase coverage of this year’s worst-performing stock market.

Zhu covered Chinese companies traded in Hong Kong and yuan-denominated stocks in the mainland as Goldman Sachs’s chief China equity strategist. She forecast in December that the Hang Seng China index would climb about 20 percent by the end of this year. It has since tumbled 16 percent and is the biggest loser among global benchmark equity indexes tracked by Bloomberg.

“China has been a difficult market to trade and difficult for all strategists to get right,” Hao Hong, the chief China equity strategist at Bocom International Holdings Co., said by phone from Beijing. “That said, Zhu is a good hire as she has done this for a long time. It shows BlackRock’s commitment to the Chinese region.”

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China To Russia: We Stand With You…..Suck It America

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The world is being divided in half as we speak. As my in depth report (coming out next week) will show it will be NATO Vs. Russia/China coalition. Today Chinese Foreign Ministry released the following statement. 

“China has consistently opposed the easy use of sanctions in international relations, or using sanctions as a threat.”

Later, Russia fought back with a statement of their own. Indicating that if sanctions are imposed they will turn to China as their primary ally and business partner. Further adding, “Western countries would largely be hurting themselves if they impose tougher sanctions.”

Who cares and why is any of this important?

As my next weeks ( Wednesday’s Report) report will show, this development will lead to an eventual war. Not in the Ukraine, but worldwide. This war will impact everyone. We are still many years away, but this is an initial development. My timing and mathematical work confirm the same.  I encourage you to visit us next Wednesday to read the report and to see how it will play out.  

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Chinese Companies Skidding Towards Default. What’s Next?

On March 4th, 2014 China experienced it’s first ever onshore default when Shanghai Chaori Solar Energy Science & Technology Co. failed to pay full interest on its bonds. Signaling two things. 1. Chinese government is no longer interested in bailing out (most) Chinese companies and 2. A lot more defaults to come. Here is where China is today. 

  • $21 Trillion Debt Mountain. Roughly the same size as the entire US Banking Sector. It took the US 220 years to get to that number, it took China just 5 years of explosive credit growth. 
  • $6 Trillion In Shadow Banking. Actually, no one knows how large this number is. I have read good data/reports putting this number at $10-15 Trillion range.  
  • Empty cities, shopping centers, massive speculative bubble in real estate, built out infrastructure, rising cost of labor and export driven economy. 

With massive debt burden, increasing borrowing costs and an upcoming bear market/recession in the US/Worldwide (2014-2017), shit is about to get real.  

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Chinese Companies Skidding Towards Default. What’s Next?  Google

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China Heralding $1.5 Trillion Emerging Debt Wall: Credit Markets

A surge in interest rates and the worst currency rout since 2008 in developing nations from Russia to Brazil are inflating corporate borrowing costs as $1.5 trillion of obligations come due by the end of 2015.

Companies in the MSCI Emerging-Market Index (EEM) are facing the highest debt loads since 2009 as profit marginsnarrow to the least in four years, according to data compiled by Bloomberg. More than 36 percent of bonds and loans by Turkish companies will mature by 2015, while Chinese firms need to pay off $630 billion, or 29 percent, of their borrowings just as the country experiences its first-ever onshore corporate-bond default.

Even as higher rates help shrink trade deficits and stabilize currencies, they are damping emerging-market economic growth, eroding corporate profits and curbing bank lending. That’s increasing the cost to refinance debt for companies from Yasar Holding AS, the Turkish maker of Pinar dairy products and DYO paints, to Brazilian sugar and ethanol producer Grupo Virgolino de Oliveira SA.

“Tightening interest rates in a bad economic cycle exacerbates the stress,” Michael Shaoul, New York-based chairman and chief executive officer of Marketfield Asset Management LLC, which oversees $21 billion, said in a March 5 telephone interview. “If economic and credit conditions start to fall apart, then how can you refinance your existing bonds?”

Junk Bonds

That stress is already being reflected by a jump in bond yields. Investors demanded 166 basis points, or 1.66 percentage points, more to hold non-investment grade debt of developing-country companies than their global peers, Bloomberg data show. The premium jumped from 34 basis points a year earlier and reached a 16-month high of 172 basis points on Jan. 31.

In China, Shanghai Chaori Solar Energy Science & Technology Co. failed to pay full interest on its bonds, leading to the first default in the nation’s onshore bond market and signaling the government will back off its practice of bailing out companies with bad debt.

The maker of energy cells to convert sunlight into power is trying to sell some of its overseas solar plants to raise money to repay the debt, Vice President Liu Tielong said in an interview today at the company’s Shanghai headquarters.

Policy makers have reined in credit expansion, helping boost the yields on three-year AAA-rated corporate bonds to 6.26 percent in January, the highest since at least 2010, according data compiled by ChinaBond, the nation’s biggest debt clearing house.

Rate Increases

Russia’s central bank unexpectedly raised its benchmark interest rate 150 basis points to 7 percent on March 3, joining central banks in Brazil, Turkey, India and South Africa in raising borrowing costs to stem their currency declines this year. Brazil’s real has retreated 24 percent over the past two years, increasing their foreign debt payments in local currencies. Turkey’s lira, India’s rupee and Russia’s ruble each tumbled 18 percent.

Interest-rate increases may slow emerging-market economic growth to the weakest expansion since 2008, increasing the financial risks for banks and corporates, economists led by Dominic Wilson at Goldman Sachs Group Inc. wrote in a note on Feb. 19. Emerging-market economies grew 4.5 percent in 2013, the slowest since the 4.45 percent expansion during the 2008-2009 credit crisis, according to the International Monetary Fund.

‘Less Room’

Gross debt in companies in the MSCI emerging-market index amounted to 2.93 times earnings before interest, taxes, depreciation and amortization in February, up from 1.46 times in June 2009, Bloomberg data show. Profit margins declined to 7.81 percent from 8.34 percent in December and 10.35 in March 2011.

“We’ve moved into this environment where weaker growth in emerging markets, slower credit growth and compressed corporate margins give them less room to absorb higher costs,” Vanessa Barrett, a credit strategist at Morgan Stanley in London said in a phone interview on Feb. 6. “That certainly will challenge the debt servicing capabilities of emerging-market corporates.”

Morgan Stanley recommends its clients sell emerging-market bonds and currencies, predicting non-performing loans for Brazilian banks may increase to 5 percent from 3 percent.

Fitch Ratings Ltd. warned in January that almost 1 trillion rupees ($16.2 billion) of Indian bank loans are at risk of souring as companies’ ability to generate cash and service debt deteriorates.

Yasar Maturity

Turkish companies including Yasar, which owns everything from meat and dairy producers to fisheries businesses, and Dogan Yayin Holding AS, a media conglomerate, may have their credit outlook cut to “negative” after the lira weakened, Fitch said Feb. 14.

Yasar has $250 million of speculative-grade notes maturing in October 2015. More than 70 percent of Yasar’s debt is denominated in foreign currencies, while most of its revenue is generated in the lira, according to Fitch. Should the local currency decline further, Yasar’s net debt will rise beyond 4.5 times Ebitda, the upper limit for the B rating assigned by Fitch, the ratings firm said in a report on March 3. The company’s leverage was 4.4 times earnings in 2012.

The company’s 9.625 percent, dollar-denominated notes due next year were yielding 11.9 percent last month in trading on Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Virgolino de Oliveira

A telephone call to Yasar’s finance department wasn’t returned and Murat Dogu, vice president at Dogan responsible for finance and capital markets, didn’t respond to calls and e-mails seeking comment.

Bonds sold by Brazil’s Virgolino de Oliveira tumbled this year as Standard & Poor’s said lower sugar prices and higher interest rates may it more difficult to refinance its “sizable” short-term debt. The $300 million of debt due in 2018 fell to 56 cents on the dollar from 80 cents in November.

Virgolino is seeking financing in the international market and is getting “a very good response,” Chief Financial Officer Carlos Otto Laure said in a telephone interview on Feb. 28.

Companies in emerging markets went on a borrowing binge following the crisis five years ago as central banks cut rates to spur economic growth.

Private credit growth in each of China, Brazil and Hong Kong was more than 60 percent of their GDP since 2008. That’s second only to Ireland, at about 90 percent, among major countries tracked by Deutsche Bank AG.

Maturity Wall

Companies in the 20 largest developing countries have $808 billion debt maturing this year and another $645 billion coming due in 2015, Bloomberg data show.

Turkey has about $36 billion in debt and loans coming due. About 86 percent of the borrowings are denominated in foreign-currencies, making them more expensive as the lira’s value declines.

Russia’s companies need to pay off $142 billion in debt within two years, accounting for 25 percent of the total, Bloomberg data show.

Borrowing costs are still low compared with three years ago. Yields on dollar-denominated corporate bonds traded at 5.21 percent, down from a peak of 7.35 percent in October 2011, according to Bloomberg Emerging Market Corporate Bond Index.

Boom-to-Bust

“Higher refinancing cost alone is usually not sufficient to cause a ‘meltdown’,” Zsolt Papp, a money manager who helps oversee $2.6 billion of emerging-market debt at Union Bancaire Privee in Zurich, said in an e-mail on Feb. 21. “It would have to be coupled with a collapse in the economy and no access to credit, basically a 2008-2009 scenario. And that looks not likely.”

Capital is becoming less available, making it more difficult for companies to roll over their maturing debt. Global investors pulled $11 billion out of emerging-market bond funds this year through Feb. 26, already approaching the full year outflow of $14 billion in 2013, according Barclays Plc.

A “multi-year elongated EM cycle of underperformance” is likely as the credit and economic growth slows, according to Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank in New York.

“A rapid increase of credit tends to associate with boom turning into bust,” Ruskin said in a phone interview on Feb. 21. “In an environment where there’s excess of credit, a slowing economy feeds on itself as assets go down and the banking system starts to decline. When financial markets seize on a theme, then things can accelerate.”

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China To America: Fu#% You And Your Human Rights

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Just as Russia, China is sick and tired of the US shoving it’s god given “righteousness” up their ass. Firing back China released a white paper on Human Rights Record of the United States in 2013. Believe it or not its quite a good read and some things are right on the money. Here are just a few points. 

  • The number of violent crimes has risen sharply. According to the Uniform Crime Reports, released by the Federal Bureau of Investigation (FBI) in 2013, the U.S. registered 1,214,464 violent crimes in 2012, of which 14,827 are murders and nonnegligent manslaughters, 84,376 forcible rapes, 354,522 robberies and 760,739 aggravated assaults
  • The U.S. engaged in a tapping program, code-named PRISM, exercising long-term and vast surveillance both at home and abroad. The program is a blatant violation of international law and seriously infringes on human rights.
  • The use of solitary confinement is prevalent in the U.S.. About 80,000 U.S. prisoners are in solitary confinement in the country. Some have even been held in solitary confinement for over 40 years.
  • ETC….

You can read the rest of the paper HERE. 

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China: Get Rich Or Die Trying

China’s goal is to grow at any cost. Forget the consequences and an eventual collapse to it’s political and economic system. That is exactly what China’s leadership is doing by pushing for 7.5% annual growth through credit.  Now, lets refresh our memory. China has….

  • $21 Trillion Debt Mountain. Roughly the same size as the entire US Banking Sector. It took the US 220 years to get to that number, it took China just 5 years of explosive credit growth. 
  • $6 Trillion In Shadow Banking. Actually, no one knows how large this number is. I have read good data/reports putting this number at $10-15 Trillion range.  
  • Empty cities, shopping centers, massive speculative bubble in real estate, built out infrastructure, rising cost of labor and export driven economy. 

Maybe I am stupid, but tell me again how this is going to end well for China? When the US financial market starts its bear market and when the US Economy enters into a severe recession, there will be hell to pay in China. When will that happen? Luckily for you, we know to the day. Please Click Here to learn more.   

make-money-or-die-trying-3

China’s leaders spurred speculation they will allow the country’s $21 trillion debt mountain to inflate after refraining from cutting their annual economic-growth target.

Analysts at Australia & New Zealand Banking Group Ltd. and Nomura Holdings Inc. said authorities will need to loosen monetary policy, after Premier Li Keqiang yesterday announced a goal of 7.5 percent growth, the same target as last year. Li said China will seek an “appropriate” increase in credit.

Any easing would contrast with leaders’ efforts to rein in a $6 trillion shadow-banking industry and control the build-up of local-government debt that followed stimulus measures unleashed in 2008. Li is seeking to support growth amid three money-market rate surges in eight months and the threat of defaults of high-yield investment products and corporate bonds.

“I had hoped that they would pay more attention to curbing the risks but instead they focused on growth,” said Dariusz Kowalczyk, Hong Kong-based economist and strategist at Credit AgricoleSA. “They will just have to pay the price of higher leverage and once they start to deal with this in earnest, the costs of solving the issue will be bigger.”

The benchmark Shanghai Composite Index (SHCOMP) fell 0.9 percent yesterday, the most in a week, amid concern that the country may face its first onshore corporate bond default. Shanghai Chaori Solar Energy Science & Technology Co. said it may not be able to make an 89.8 millionyuan ($14.7 million) interest payment in full by the March 7 deadline.

Trust Bailout

The warning came little more than a month after the nation averted its first trust default in at least a decade as investors in a 3 billion-yuan high-yield product issued by China Credit Trust Co. were bailed out days before it matured.

Shadow banking was rated as the biggest challenge for the Chinese economy by more analysts than any other concern in a Bloomberg News survey of 29 economists ahead of the National People’s Congress meeting. The risk of vested interests blocking efforts to increase the role of markets in the economy was the next most-cited issue.

Economists also saw dangers from the property market; the increased funding required to generate each unit of gross domestic product; local government debt; and the threat that liberalizing interest rates will trigger financial turbulence.

The combined debt of Chinese households, corporates, financial institutions and the government rose to 226 percent of GDP last year, up from 160 percent in 2007, Credit Agricole estimated in a report last month. GDP reached $9.4 trillion in 2013.

Creating Money

“Given increasing credit risks, many would have expected Mr. Li to talk about financial deleveraging of some sort,” Kevin Lai, economist at Daiwa Capital Markets in Hong Kong, wrote in a note. “There is still a desire to ensure enough money is created to satisfy the refinancing pressure from many borrowers.”

The economy expanded 7.7 percent in 2013, the same pace as in 2012. Previous data this year have shown a slowdown in manufacturing, while trade and credit expansion exceeded estimates.

This year’s growth target is “flexible and guiding,” the National Development and Reform Commission said in a related report yesterday.

Li, who reiterated that China will pursue a “prudent” monetary policy, announced a target of 13 percent growth in M2, the government’s broadest measure of money supply. That was the same target as last year, when M2 expanded 13.6 percent. The budget deficit as a percentage of GDP will be about the same as last year, Li said at the annual meeting of the legislature in Beijing.

Leverage Pace

“If they are pursuing a trajectory to slow down the pace of leverage they should target a slower M2 growth,” said Wang Tao, chief China economist at UBS AG in Hong Kong, who previously worked at the International Monetary Fund. “Without doing that it’s not clear.”

People’s Bank of China Governor Zhou Xiaochuan may elaborate on monetary policy during a press briefing that normally is held during the legislature’s meeting, which ends March 13.

China hasn’t adjusted benchmark interest rates since July 2012 and is in the process of removing controls on borrowing costs and savings rates.

Currency Bets

The yuan slumped about 1.4 percent in February amid speculation the PBOC wants an end to the currency’s steady appreciation before a possible widening of the trading band. The yuan climbed 0.24 percent yesterday, the most since 2012, on anticipation the central bank has reached its goal of discouraging one-way bets on the currency after spurring last month’s record decline.

Zhou said recent foreign-exchange rate moves are “normal,” the official Xinhua News Agency reported on its microblog on March 4.

Not everyone saw a conflict between the growth target and China’s vow to introduce more market-driven change. Stable economic and labor-market conditions are “conducive for actually implementing the top-down reforms,” Qu Hongbin, chief China economist with HSBC Holdings Plc in Hong Kong, wrote in a note yesterday. “Reform and growth should support each other.”

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Is China’s Default Problem Much Bigger Than Anyone Thinks?

While on the surface China looks like a shiny example of economic prosperity, in reality, it is a rotten corpse of bad debt. I have written about China extensively in the past. About its economic growth, shadow banking, bad loans, empty cities and speculation in various sectors of the economy. Just ask any taxi driver in China and he will assure you that real estate never goes down. 

In a shocking development, now even the Chinese brokerage houses are coming out with statements like “China’s bond market will definitely see its first default this year,” and “There should be a default in China’s onshore bonds this year”.

Why should we care and what will the impact be? 

Listen, there is no doubt that China will face a lot of economic problems over the next decade. So much so that I fathom it might even lead to some sort of social unrest or even a revolution. Everyone needs a good revolution now and then. With that said, China will do what it need to do in order to keep its economy going. No matter how bad it gets, China will try to paper over any bad debts with more liquidity, shadow banking, off balance sheet entries and so forth.

Will we see a collapse? Probably not, but we will see a lot of defaults throughout the Chinese economy over the next few years. As such, it would be prudent not to have any debt exposure to the Chinese market. 

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——————————————————————————————————————Junk Yield Premiums Soar on China’s Looming First Default

The extra cost to borrow for China’s riskiest companies is at the highest in 20 months as soaring interest rates heighten concern the nation will experience its first onshore bond default.

The yield gap on five-year AA- notes over AAA debt jumped 27 basis points last month to 224, the most since June 2012, Chinabond indexes show. Ratings of AA- or below are equivalent to non-investment grades globally, according to Haitong Securities Co., the nation’s second-biggest brokerage. The similar spread in the U.S. is 403 basis points, Bank of America Merrill Lynch data show.

The failure of coal companies to meet payment deadlines for trust products has increased concern over debt defaults, with the equivalent of $53 billion of bonds sold by renewable energy, construction materials, metals and mining companies due in 2014. A report on Jan. 30 signaled China’s factories are contracting for the first time since August amid signs of financial stress including mounting losses and bailouts.

“China’s bond market will definitely see its first default this year,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “The economy is slowing while the government seems still confident about growth, which means the authorities probably won’t announce any measures to avert the slowdown. This is the worst scenario.”

Financial Panic

A further $21 billion of securities in those three sectors mature in 2015, the Bloomberg data show, with companies including Baoshan Iron & Steel Co., China Minmetals Corp. and Wuhan Iron & Steel Co. among the most indebted. Bonds of steel and coal companies are under added pressure considering the government’s campaign to reduce smog, and industry overcapacity, according to Moody’s Investors Service, which has a negative outlook on both.

LDK Solar Co. is looking at ways to restructure obligations on its offshore yuan debt after missing payments on its dollar debt last year. Zhuhai Zhongfu Enterprise Co. (000659), a manufacturer of beverage packaging, said on Jan. 28 its 2015 debentures may be suspended from trade after its estimated net loss was as much as 450 million yuan ($74.2 million) in 2013. The yield on the 5.28 percent notes has climbed 217.5 basis points this year to 18.76 percent, exchange data show.

Steel, Shipping

The world’s second-biggest economy slowed in the fourth quarter to 7.7 percent from 7.8 percent in the previous three months as Premier Li Keqiang drove up money-market rates to encourage companies and local governments to deleverage.

China’s central bank signaled in a Feb. 8 report that volatility in money-market interest rates will persist and borrowing costs will rise, further underscoring the risk of defaults which could weigh on confidence and drag down growth.

China Credit Trust Co. reached an agreement last month to repay bailed-out investors in a high-yield product whose threatened failure spurred concern bad debts will rise in the nation’s $1.7 trillion trust industry.

The gap between top-rated and lower-rated bonds in China may widen further this year as news about possible defaults shakes the market, according to Cheng Qingsheng, an analyst at Evergrowing Bank Co.

“There should be a default in China’s onshore bonds this year,” Shanghai-based Cheng said. “Privately issued bonds have higher default risks than publicly traded bonds.” A first default may happen in the steel, coal, shipping or photovoltaic power industries, Cheng said.

Default Swaps

As default concerns escalate, the cost of insuring the nation’s debt against non-payment is rising. China’s credit-default swaps have increased 13 basis points this year to 93 as of Feb. 7. Theyuan fell to 6.0646 per dollar on Feb. 7, the lowest level this year. It was little changed at 6.0605 as of 10:32 a.m. in Shanghai.

There have been no defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s.

Local governments have helped some companies avert missing payment deadlines, according to Yao Wei, the Hong Kong-based China economist at Societe Generale SA. CHTC Helon Co., a fiber maker which used to be called Shandong Helon Co., repaid 400 million yuan of notes in April 2012 even as it failed to make loan repayments.

Shanghai Chaori Solar Energy Science & Technology Co. (002506), which averted default on an interest payment last year and had just 618.7 million yuan cash as of September, will pay 898 million yuan of debt in March, according to Guotai Junan. The solar-panel maker’s debt-to-asset ratio was 90.1 percent at the end of the third quarter, according to a company financial report released Oct. 27.

High Cost

Other companies are receiving help from related entities. Changzhou Wintafone Chemical Co., a maker of herbicides and insecticides based in the eastern province of Jiangsu, said last month it’s stopped production and can’t repay notes due in March. Changzhou Qinghong Chemical Co., the note’s guarantor, repaid 36.9 million yuan on its behalf on Jan. 17.

A first default may be avoided if local governments continue to step in, said Beijing-based Yang Feng, a bond analyst at Citic Securities Co., the nation’s biggest brokerage.

“The cost of a default on a bond would be very high,” said Yang. “If a company in Shanghai defaults, it would be difficult for every company in the city to raise money.”

Turning Cautious

The yield on AA- rated five-year corporate bonds climbed 13 basis points last month to 8.38 percent. The rate on the benchmark five-year government bond dropped 24 basis points to 4.22 percent over the same period.

The average yield on high-yield Dim Sum bonds, or yuan-denominated notes sold in Hong Kong, has climbed 14 basis points this month to 5.66 percent on Feb. 6, the highest since October, according to an index compiled by HSBC Holdings Plc. Yields averaged 5.52 percent on Dec. 31.

U.S. dollar-denominated 13.25 percent notes sold by Glorious Property Holdings Ltd. (845) in February last year and due in 2018 were yielding 19.61 percent on Feb. 7, Bloomberg-compiled prices show. The company’s chief executive officer and chief financial officer resigned last week, less than one month after shareholders rejected an offer by Chinese billionaire Zhang Zhirong to take the developer private.

“Investors have turned cautious on high-yield bonds,” said Guotai Junan’s Xu, who forecasts China’s economy will grow 7 percent this year. “Since China’s onshore bond market hasn’t had a default, the market may not have priced in all the risk it should have.”

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The Secret Behind China’s Brilliant Population Control Strategy

Bloomberg Writes: Like Its Neighbors, China Struggles With an Aging Population

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China’s population is aging, largely because of the one-child policy in place for decades.

With China’s population likely to peak by 2020 and then start declining sharply, the government will have no choice but to act soon, according to Ting Lu and Xiaojia Zhi, China economists with Bank of America Merrill Lynch (BAC) in Hong Kong. “We are highly convinced the Chinese government will announce a significant change (allowing families to have two children if at least one parent is a singleton) to the outdated one-child policy in the next few months,” write Lu and Zhi in a new report.

Further details of party policy decisions published Friday by the official Xinhua News Agency show that change is indeed coming: Couples will be able to have two children if either parent is an only child….

Read The Rest Of The Article Here

When it comes to population control and its future economic growth I am not sure what to think here. China is either performing brilliantly or has dropped the ball big time.  

From the initial analysis it looks China has dropped the ball by about 10-15 years and that gap will cause significant disturbance in both the Chinese Economy and Chinese Society. Yet, if you look at the situation from an analytical standpoint, they might be right on the money. Unlike the US, China doesn’t have massively underfunded entitlement programs like Social Security and Medicare. As such, China’s generational transition will be much easier. Further, China’s government doesn’t have to worry that much about its older generation.  Chinese family structure requires younger generation to care of the older one, taking the government out of the equation and making things much easier (unlike in the US).

As such, I believe China is executing its population control strategies perfectly by now allowing couples to have more than one child. If these laws work as anticipated and lead to a baby boom in China, it will give the Chinese economy another  boost in growth in about 20 years.  

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China Wants 7.2% Economic Growth, I Just Want A Ferrari For Christmas

BusinessWeek Writes: China Needs 7.2% GDP Growth for Jobs, Says Premier

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Thanks to the Workers’ Daily, we now know a little bit more about how Chinese economic growth translates into jobs creation—or at least how top Chinese officials view that crucial equation.

Speaking at a national congress for China’s official trade union two weeks ago, Premier Li Keqiang said that China needs economic growth of at least 7.2 percent in order to ensure adequate employment, the Beijing-based newspaper reported on Nov 4. “The reason why we want to stabilize growth, in the final analysis, is to preserve jobs,” Li said at the union meeting on Oct. 21.

Li also pointed out how important the rest of the world remains for ensuring adequate employment in China. All told, China has some 30 million workers who are directly dependent on China’s export industries, and an additional 100 million serving in supporting industries, Li said. “If exports fall rapidly, it will create an employment problem,” he said.

Read The Rest Of The Article Here

China is going to be an exciting case to watch and study over the next couple of years. It is no doubt understandable that Chinese officials want fast economic growth rate, but we don’t always get what we want.  Particularly, considering my forecast for the US Economy and its financial markets.

At least at this stage, I do not believe that 7.2% economic growth is feasible for China over the long run.  Not even close. The problems stems from the fact that about 25-50% (some claim much more) of Chinese economic growth over the last decade came from capital misallocation and pointless infrastructure projects.  Also known as, empty cities, rail networks, roads to nowhere, etc….  That is one of the reasons Chinese banks are sitting on a time bomb called bad loans that thus far they have been able to ignore.  The problem for China is, there isn’t that much more infrastructure or capital misallocation work left to do and bad loans increasingly becoming a huge problem.  As such, I believe China has no room left for 7.2% economic growth.

Add to that an upcoming global recession (based on my work), subsequent export slowdown and China finds itself sitting on a powder keg of economic trouble. What happens if all of the issues above come home to roost at the same time and instead of 7.2% economic growth China ends up with 2-3% or god forbid even goes negative.  With massive unemployment and certain public unrest  it would be fascinating to see how China comes through.  Will its communist government be able to survive or will Chinas pain be so great that a new political system will be established.

That is why it will be so exciting to watch China over the next few years.

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Chinese Government Cooking Books. No, Really???

Bloomberg Writes: China Beige Book Shows Slowdown, Opposite Official Data

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China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige Book President Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter — no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

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Continuing our China watch, I want you to read the two paragraphs above very carefully.  I have been saying all along that Chinese miracle growth story is anything but true. Yes,  I would be the first to admit that China has a bright future and a potential. However, as of right now, that is all it is.

Before China can reach that potential and overtake the US Economy it will have to go through significant economic imbalances, bad loans, capital misallocation and property bubbles that Chinese government has baked into the system in return for seemingly amazing Economic growth.  Yet, everything has its cost.

The Chinese government can cook its books all it wants, but sooner or later the reality will catch up to it. With China’s real economic growth slowing down significantly (as per report above), structural issues coming home to roost and global economic slowdown just around the corner,  the moment of reckoning might be close at hand. 

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Hey China, What Is That On Your Balance Sheet

Reuters Writes: Analysis: China eyes private funds to tackle bad-debt buildup, avoid bailout

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(Reuters) – Faced with a chorus of warnings that China risks choking on bad debts, Beijing is pushing banks to raise private capital in an effort to head off the need for a second government bailout in as many decades.

The hangover from a credit binge that powered China’s swift recovery from the global financial crisis, combined with the economy’s slowdown, has prompted expectations of a repeat of the early 2000s, when Beijing shored up its major banks with hundreds of billions of dollars.

Right now, however, authorities appear focused on pushing banks to bolster their balance sheets by aggressively enforcing new international bank capital requirements, known as Basel III.

Some analysts say warnings of an impending crisis are overdone.

Goldman’s analysts calculate that China’s total debt-to-GDP ratio has surged by 60 percentage points since the global financial crisis. It says such a rapid increase is often associated with financial crises, even if the absolute level of debt is not excessive.

“China must get to a point where it can get back on a healthy growth path that is not dependent on massive amounts of credit every year,” said Fitch’s Chu last month.

Read The Full Article Here

As I have written many times before. I believe China is in big trouble. The article above clearly illustrates the fact.

Basically, no one really knows what is on the balance sheet of Chinese Banks. Not the government, not bondholders, not investors and in many cases not even the banks themselves. However, the nonperforming loan numbers being thrown out by some analyst are downright scary.

Does Chinese Government sees/understands that and by pushing banks to raise private capital trying to “Scam” outside investors while minimizing impact on Chinese economy in case of a collapse?

I believe so. What they are trying to do is recapitalize the banks before Credit Time Bomb in Chinese financial system goes off.  Mind you, any collapse can happen very fast in China. Just as it happened for Lehman Brothers in the US in 2008. Once nonperforming loans truly blow up and liquidity dries up, most Chinese banks might fight themselves insolvent literally overnight (just as Lehman did). Be aware and beware of this.  

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