A Flood of Toxic Loans in China Is a Bonanza for Debt Buyers

• Investors have more bargaining power as banks market NPLs: CDH
• Bad loan packages become bigger and cheaper as supply jumps
  
  https://www.bloomberg.com/news/articles/2019-05-14/a-flood-of-toxic-loans-in-china-is-a-bonanza-for-debt-buyers?srnd=premium-asia

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

• Neoglory has the inglorious title of biggest 2019 defaulter
• A state-linked issuer is among the five biggest in year so far

•  

• Mnuchin sends tweet saying talks concluded, were constructive
• Officials want no discrepencies in translations: People
  
  https://www.bloomberg.com/news/articles/2019-03-29/china-u-s-said-to-pore-over-details-of-text-to-end-trade-war?srnd=premium-asia

SINGAPORE (Mar 28): Singapore investment banking activities generated US$172.8 million ($234 million) in fees in the first quarter ended Wednesday, which was 24.8% lower compared to a year ago.

This according to the latest 1Q19 Singapore Investment Banking Review preliminary data published yesterday by Thomson Reuter& rsquo s Refinitiv.

Advisory fees for completed mergers and acquisitions (M& A) came in 63.6% lower at US$45.2 million from a record high of US$124.0 million in 1Q18.

The report also saw ECM underwriting fees increased 279.1% y-o-y to a six-year high of US$60.8 million, while fees from DCM underwriting fees also increased 14.9% to US$51.9 million.

Syndicated lending fees however saw a 66.5% decline to US$14.9 million, after a strong 1Q18.................
https://www.theedgesingapore.com/investment-banking-fees-fall-quarter-us173-mil-1q-refinitiv