Financial crises can happen quickly, like the bursting of the tech stock bubble
in early 2000, or slowly, like the late-1980s junk bond bust. The shape of
the crash depends mostly on the asset in question: Equities can plunge literally
overnight, while bonds and bank loans can take a while to reach critical mass.
China's bursting bubble is of the second type. During its post-2009 infrastructure
binge, trillions of dollars were lent to (way too many) producers of cement,
steel, chemicals and other basic industrial inputs. And now a growing number
of them can't make their payments:
A Chinese fertilizer maker and a pig iron producer have flagged bond payment
difficulties, adding to signs of stress in the nation's corporate note market
after at least six defaults this year.
Jiangsu Lvling Runfa Chemical Co., based in the eastern city of Suqian,
is asking its guarantor to repay 53.1 million yuan ($8.3 million) in bond
principal and interest due Dec. 4, according to a statement posted on Chinamoney's
website. Sichuan Shengda Group Ltd., based in the southwestern province of
Sichuan, is uncertain it can repay notes due in 2018 that holders can opt
to sell back early on Dec. 5, it said in a statement on the same website
Thursday.
More companies in China are struggling to repay bonds amid the worst economic
slowdown in a quarter century. China Shanshui Cement Group Ltd. this month
became at least the sixth company in 2015 to default on yuan-denominated
domestic notes. State-owned steel trader Sinosteel Co. postponed a bond payment
for a second time last week.
The guarantor of Jiangsu Lvling Runfa's bond is Jiangsu Re-Guarantee Co.
The bonds are so-called collective notes, which are typically issued by several
small- and medium-sized companies that don't have the ability to sell securities
on their own. A filing earlier this week didn't specify the other issuers
of the 6.2 percent notes that have a face value of 100 million yuan.
Bank of Tianjin Co., the trustee manager on Sichuan Shengda's notes, said
it will hold a bondholder meeting on Dec. 3, according to a statement to
Chinamoney Thursday. Sichuan Shengda's subsidiary's pig iron production is
in halt because of falling prices and the cash shortage, the lender said
in a separate statement.
Sichuan Shengda and its subsidiary had a total of 514.41 million yuan of
overdue borrowings as of Nov. 25, according to Bank of Tianjin's statement.
The stress isn't limited to bonds. China Fishery Group Ltd. failed to repay
a $31 million installment due earlier this month on a $650 million loan,
according to Standard & Poor's. Creditor banks may have found it difficult
to roll over the debt following a government investigation the company flagged
in August, according to JPMorgan Chase & Co.
What happens next? In the standard script, defaults begin to snowball as companies
unable to pay their off bonds, bank loans and supplier bills cause their creditors
to either fail or scale back lending, which impairs other leveraged companies,
and so on, until things get out of hand. Then the government either steps in
and tries to bail out what's left of the market or stands aside and allows
the bad debt to liquidate.
In actual capitalist societies, option number two is how unwise loans and "malinvestment" are
liquidated to return the system to health. But lately everyone has been choosing
option number one, which means socializing the private sector's debt by recapitalizing
banks and borrowers with taxpayer funds. This averts a crisis in the moment
while setting the table for an even bigger mess in the future.
It's a safe bet that China, following the developed world's lead, will soon
toss a big chunk of its foreign exchange reserves at the problem. When this
fails, the next steps include QE and negative interest rates, which take money
from savers and retirees and give it to banks, again with the hope of moving
the inevitable crash to some later date. The result? An even more highly-leveraged
world and Potemkin markets that look real but no longer are.
