Rub A Dub Dub, 5 Debtors In A Tub

Rub a dub dub,
Five debtors in a tub,
Do you think they'll all default?
A chemical producer, chicken processor, a sausage maker,
a tin smelter and a coal miner
Why the hell I buy Chinese bonds, oy gevalt.

Bloomnberg: Five China Bond Deadlines to Watch


PMI Breakdown: Opposite of Reform Efforts

CREIS: New Home Price Rise Increases in November

CREIS 100-city survey shows an increase of 0.46% for the month of November. This is an improvement from the 0.30% increase in October and shows the opposite trend from the NBS October figures, which showed a slowdown in the price rise. It also contradicts some of the reports that were out in November, which pointed to a weaker real estate market (than the previously strong Jul-Sep period). From the survey page data linked below, you can clearly see the increase is narrow. Of the 100 cities, 59 saw home pricse fall or stay flat. The average declines were lower though. The 75th city was Yangzhou, down 0.68%. In October, it was Zhenjiang, down 0.84%.

The biggest increase was Suzhou, up 2.84%. Shenzhen was second, up 2.54% on the month. Guangzhou new home prices fell 1.24% in October an another 0.33% in November.

100-city Survey data: 2015年11月中国房地产
Google Translated: 100-city Survey Data page

China's Rebalacing Scenarios

Michael Pettis outlines several rebalancing scenarios in China’s rebalancing timetable. He drives home the point that credit growth and GDP growth are linked and short of taking significant steps to reduce debt, it is very difficult to get out of a debt.
What matters is the associated growth in credit. If growth next year of 7% were achieved with 18% growth in credit, things would actually be getting worse, not better. On the other hand if China grew next year by 5%, with credit growing at “only” 8%, this would represent a significant improvement in China’s medium- and long-term growth prospects. This is something that a lot of economists seem to have real trouble in understanding. There is no “good” level of economic growth independent of the associated growth in credit.

Ultimately, and to repeat Conclusion 5 above, Beijing must continuously choose between a rising debt burden, rising unemployment, or rising transfers of wealth from the state sector. All of its policy options boil down to one or more of these three. So far it has mostly chosen the first, but this can only go on until the country reaches debt capacity limits.
One point he makes is that Beijing has credibility in its ability to prevent a debt crisis:
...that for those who believe (and I include myself in this group) that the structure of Chinese financial markets and Beijing’s high credibility give it protection from the risk of debt crisis...
but he also notes that Beijing does not have the power to abolish the laws of economics:
In fact the real cost of excessive debt levels is what finance specialists call “financial distress” costs, and I have explained elsewhere how debt can become excessive. China is already experiencing financial distress costs and as debt rises, these costs will make it harder and harder for China to achieve target growth rates except at the expense of even more debt, so that rising debt automatically means lower growth than otherwise.
The area where I see this eventually having an impact in on the area Beijing increasingly cannot control: the currency.

Yu Fenghui: 50% Layoffs For Banking Sector Not Alarmist

The impetus for Yu Fenghui's latest blog post (未来银行业或裁员50%不是危言耸听) was comments by former Barclays CEO Anthony Jenkins:
Ultimately, those forces will compel large banks to significantly automate their business. I predict that the number of branches and people employed in the financial services sector may decline by as much as 50% over the next 10 years, and even in a less harsh scenario I expect a decline of at least 20%.
China has one of the world's most retrograde banking systems and at the same time, perhaps the most advanced Internet banking in the world.

The financial industry is a perfect microcosm of China's reform efforts and perhaps its most extreme form. The big four banks are not only the largest companies in China, but also the core of the government's old central planning model. The banking system is years behind the developed world. In contrast, Internet banking in China is more advanced thanks to a lack of regulation. While that has allowed a credit bubble to flourish, at the margins it has also allowed Internet businesses to experiment with new forms of financial services.

With the yuan entering the SDR basket and China poised to open its capital account, China could do to financial services what it did to textiles. The catch is that in order to create a globally competitive financial sector that can go head to head with developed nations, China has to eat its own banking system first. Nothing on the reform front suggests China is willing to allow the level of creative destruction required to make the leap.

China Average Household Assets Climb 20% In Two Years, Housing 70% of Assets

"2015 Chinese household average asset growth of 20.2% compared with 2013, the largest increase in financial assets, up 59.4 percent." She said, results from the survey, household financial assets grew mainly from the growth in risk assets, especially equities and Finance product, compared with 2013, the stock rose 92.5 percent, while financial products is soaring to 198.5 percent. But Li Feng also pointed out that "this growth model is not sustainable, because the growth was mainly derived from the volatility of prices of financial assets and real estate."
Real estate is almost 70% of household wealth:
"This reflects our home equity liquidity is very weak. This and all the people have a sense of tradition related to real estate, but also that everyone's income is not too high, there is no more money to configure highly liquid financial assets , there is the Chinese people, financial awareness is not enough. "Bong told reporters in Chengdu Commercial Daily, the Chinese people's debt levels are much lower than the United States, indicating that financial services be improved.
While Chinese save a lot and buy homes, they don't do much more with their money. The stock market casino is a popular way to gamble, but most people aren't playing:
Meanwhile, Bong contrast to the US data, the Netherlands and the three countries of China, the United States and the Netherlands, family financial knowledge index were 75.3 and 78.8, while China is only 42
The 217 million people in China's middle class have average wealth of $127,000, which give it the highest total wealth in the world, but per capita it lags behind the U.S. and Japan:
Center findings show that Chinese middle-income families to 217 million the number of the adult population, average wealth of $ 127,000...

iFeng: 调查称中国家庭平均资产92万 房产占比近7成


2016 Default Risk For Dozens of Bonds

Haitong says credit risks have only begun to rise as the bill for China's overcapacity begins to come due.
Economy is still searching for a bottom, the credit risk from industry overcapacity is only just beginning to be released, there will be more and more enterprises defaulting, breach of contract will become as commonplace as the ratings downgrades. No domestic bond cross default clause, raised debt default within the next year may be the following two cases, one is creditors may initiate bankruptcy proceedings before maturity, and second, there are bonds due within the next year that will be difficult to pay back.

In the first case, we screened out insolvent or net assets fell rapidly, will probably insolvent within a year, a total of seven issuers. In the second case, a large screened liquidity pressures issuers, mainly consider two aspects, one is the continuous emergence of large losses or a loss, the second is a low degree of coverage of the book fund short-term debt. Screening results, a total of 49 large and there are liquidity pressures bond issuer before maturity or sold back to the end of 2016, the corresponding bond has certain payment risks. (Author: Haitong Bond Jiang Chao, Zhou Xia, Zhu Zheng Xing, etc.)
Soem specific bonds are mentioned in the article. Some not at all surprising such as Baoding Tianwei, which has a bond due in April 2016.

CN Stock: 警惕:这类公司违约风险大(附判断方法)

China's Bubbly Bond Market

Retuers: China's shadow banking risk shifts to booming bond market
A year after China's financial regulators squared up to the systemic perils of "shadow banking", the threat is shifting to a booming corporate bond market, and risky borrowers' debt is finding its way into products aimed at retail investors.

An opaque network of trust companies and non-bank lenders had grown their annual market to a hefty 2.9 trillion yuan ($450 billion) in loans before regulators stepped in, spooked by rising defaults on wealth-management products (WMPs) backed by such high-interest shadow lending.


Hope Died In China This Week

There is a saying that any headline with a question can be answered "No."

That said, mood has soured in the past couple of weeks and the analog is entering the period when, if history keeps rhyming as before, the market is due to turn lower.

Recent headlines on China have been negative.

Posts here: Another December Devaluation Call; Chinese State Owned Mining Assoc Asks Govt to Buy Their Inventory; and Hope For China's Economy Smashed To Pieces.

Now another devaluation call has been made (making it three in as many days) based on the IMF lowering the yuan's weight in the SDR basket: IMF Ratio Concern Depresses Yuan as Mizuho Warns of Further Drop
The yuan fell toward a three-month low amid concern China will win a smaller weighting in the IMF’s Special Drawing Rights than some analysts predict.

While International Monetary Fund staff estimate a weighting of 14 to 16 percent, the market consensus is for 10 percent because of the currency’s limited usability, according to Mizuho Bank Ltd.
Even the China Daily is posting negative views: Demand unlikely to boost yuan despite basket inclusion
The International Monetary Fund's decision to include the yuan in the Special Drawing Rights basket will not directly increase the demand for yuan assets. Also, the implicit endorsement of the yuan as a reserve asset is unlikely to sway the decisions of global asset managers. Indeed, China's market interventions this year in response to capital outflows and the bursting of the equity bubble provide strong reasons for them to steer well clear.
Defaults continue to mount. Bloomberg: China's Bond Stresses Mount as Two More Companies Flag Concerns
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.

...The guarantor of Jiangsu Lvling Runfa’s bond is Jiangsu Re-Guarantee Co.
Jiangsu Re-Guarantee says they will fulfill their obligation if the firm indeed cannot pay its debts. Anytime a credit guarantee is involved a red flag should go up because if they cann't cover the guarantee, all the loans guaranteed by the firm could be called by banks. The Chinese headline says credit market pressure is as big as a mountain. 本周两家公司发出违约警报 债市压力山大

Stock market specific headlines: China Stock Bulls Hit Breaking Point as State Dials Back Support

China Calm Shattered as Brokerage Probe Sparks Selloff in Stocks
China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.

The Shanghai Composite Index sank 5.5 percent, with a gauge of volatility surging from the lowest level since March. Citic Securities Co. and Guosen Securities Co. plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities Co., whose shares were suspended from trading, is also being probed. Industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.

Finally, Chinese economic data continues to deteriorate aside from a pick-up in some consumer data points. If China were rebalancing, this would be a positive sign, but the consumer is a lagging indicator. Even in the U.S., the consumer sector is overweighted and the manufacturing sector discounted because GDP doesn't fully measure it (See: GDP Stands For Garbage Data Point). The summary of the Chinese data points:

Price: October 70 City house prices continue weak rebound. Producer prices hit a new low last week.

Demand: Downstream real estate, household appliances weaker, passenger car picked up. Midstream steel, cement, chemicals weaken. Upstream coal is still weak, weak freight.

Inventory: Downstream real estate remains high, passenger cars, home appliances fair. Midstream steel worsened, cement deteriorated, chemicals fair. Upstream coal, nonferrous metals still high.

iFeng: 中国经济仍未见起色 中观行业上中下游继续探底


Retail Sector Has Highest NPL Ratios

This report by debt analyst Jiang Chao of Haitong Securities calls manufacturing a disaster area, but its NPL ratio is around 4% versus 7% for retail/wholesalers. Perhaps banks don't use as many tricks to suppress bad retail debts?

3.4 Risk 2.4: wholesale and retail, manufacturing industry is the hardest hit

Wholesale and retail industry, the main source of manufacturing or non-performing loans for 15 years and produced.

Among them, the wholesale and retail sectors most sensitive to the transfer of the money, the economy continues downward, industry revenue low boom exacerbated the difficulties of enterprises, increasing accounts receivable mean the weakening of the industries and enterprises solvency. For the purposes of the four major state line, wholesale and retail of non-performing loans ratio of about 7%, of which a maximum of about 7.82% Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China about 7.09% and 6.09% respectively. At the same time, the manufacturing sector is also a hit, CCB and ABC's non-performing loans in the industry rate of over 4%, which is high labor-intensive textile and clothing NPL ratio.
No surprise at the lowest NPL industries, utilities:
Transportation, storage and postal services, electricity, heat, gas and water production and supply industry, as well as the lowest non-performing loan ratio in water conservancy, environment and public facilities management industry, currently the average less than 0.5%, or derived from such industry has a stable cash flow. With the development of steady growth policies, such industry will continue to reduce risk.
Numbers are worse in the Pearl River Delta: China Construction Bank's division there saw its small and medium enterprise NPL ratio break 2% at the end of June, and then climbed to 2.41% by the end of September. Not as bad as the recessionary Northeast though.
In addition, the Northeast region is still the focus area of non-performing loans of individual banks, such as China Construction Bank and China CITIC Bank
Weakness is in corporate debt which is rapidly deteriorating:
Bad corporate loans was significantly higher, and the deterioration of rapid growth.

First, the company is higher than the non-performing loans of commercial banks overall non-performing loan rate of nearly 60BP, such as the Agricultural Bank report shows 15-year corporate NPL rate of 2.43%, while non-performing loans only point of the Agricultural Bank 1.83%. Construction Bank NPL ratio of corporate loans is also more than 2%, while the Construction Bank non-performing loans is only 1.42%. Secondly, the rate of deterioration in bad corporate loans quickly, with state-owned banks, for example, the rate of about six months between the upstream reach 35-40BP.

NPL ratio of personal loans is more stable.
The conclusion of the report:
We expect that the real NPL ratio in 2016 will accelerate upward, need to guard against credit risk of individual regions and individual sectors outbreak.

This report was the top headline in the iFeng finance section. A day earlier, a report by Industrial Bank was in the top spot, it's headline was Hope For China's Economy Smashed To Pieces.

iFeng: 2015年中国不良贷款率四大风险点暴露(名单)

Chinese Housing Inventory Rises More Than 100 Million SQM in 2015

Although first-tier and in demand cities are experiencing drops in inventory, the overall national inventory of new housing has climbed more than 100 million square meters, to more than 686 million square meters.
"Data from January to September has shown, the national housing new construction area, completion of the area, land acquisition area and land transaction price of four typical indicators for the first time negative growth, which is unprecedented." Wang Zhong, director of Real Estate Research Center, Fuzhou University, said to October while four indicators are still showing negative growth. High inventory, investment fall is currently China's largest property market fundamentals.
This is the catch-22 for China. To reduce inventory, investment must fall, but GDP relies on the real estate industry.

Inventory might be double current levels once unfinished and unstarted projects are added to the mix, as well as unreported supply:
Unsold existing homes area after it is completed, not including a large number of the construction and did not start the potential stock not completed. In addition, there is a small property room around the country, as well as some not included in the statistical coverage of residential projects, as well as some not even rule should be reported unreported stocks. "Once recognized, Chinese property stocks may be doubled." Shanghai E-House Real Estate Research vice president Yang Hongxu said.
Third and fourth-tier cities remain the trouble spot, particularly the high-end:
"The current real estate market oversupply is structural overcapacity." CRIC Research Center analyst Huang Bin said. Reporters also found that in many interviews, while the overall stock continued to rise, but in the city, region, size, price, etc., but there are different degrees of differentiation: third- and fourth-tier cities, a number of central and west cities, high priced large apartments do not sell, inventory remains high.
Investment assets have inverted demand curves: as the price rises, so does demand. Due to Chinese housing being heavily driven by investment, falling prices leads to less demand:
A residential suburb of Fuzhou Lianjiang County residents told reporters that the district less than a third in the evening light. From 2011 opening for the first time sold more than 5000 yuan per square meter, and now down to 4000 yuan, few people want it. It's a microcosm of many four-tier cities in China.
Sales have risen in 2015, but it failed to dent inventory in most cities:
There is a big differentiation between Midwest City and the eastern coastal cities. National Bureau of Statistics data show that from January to October, the eastern part of real estate sales 3.9204 trillion yuan, an increase of 20.7%, the central region of real estate sales 1.2946 trillion yuan, an increase of 9.5%, the western region real estate sales 1.2639 trillion yuan, an increase of 4.6%.

iFeng: 楼市库存1年猛增过亿平米 部分房子不好卖


Poland Dumps EU Flag

The euro and EU political project are dead men walking.

Breitbart: New Right Wing Polish Government Removes EU Flags
Asked about the change, Mrs. Szydlo said she was happy with Poland remaining inside the European Union and the North Atlantic Treaty Organisation, but national matters called for the national flag.

In future government press briefings “will be held only with the most beautiful red and white Polish flags”, said Mrs. Szydlo.

The move has been called a ‘snub’ by Britain’s Financial Times and even prompted former Belgian prime minister and senior European Union parliamentarian Guy Verhofstadt to tweet “So you do not wish EU flags, but still want EU money?”.
Social mood is still relatively positive...though not in Poland.

Another December Devaluation Call

Yu Fenghui: 美元指数突破100大关带来何影响?
I predict, after the completion of the yuan into the [SDR] basket, the United States will raise interest rates in December and the dollar will continue to rise, and the yuan will be hard pressed to continue to withstand the depreciation pressure. From the beginning of December, the RMB should start a devaluation. Of course, the powerful Chinese central bank is likely to intervene or entice big banks to sell dollars and buy its RMB in exchange rate intervention. But this is not a permanent solution, by adding RMB to the SDR, the government has promised not to interfere with currency movements. In short, from the end of the year a comparatively large RMB devaluation should be expected. Investors should pay close attention to US interest rates, the trend of the US dollar and the renminbi, to prevent exchange rate losses.

Chinese State Owned Mining Assoc Asks Govt to Buy Their Inventory

Maybe the PBoC can buy all surplus metals, housing and any debt people don't want.
Reuters: Chinese aluminum, nickel producers ask state to buy up surplus metal
China's aluminum and nickel producers have asked Beijing to buy up surplus metal, sources said, the first coordinated effort since 2009 to revive prices suffering their worst rout since the global financial crisis.

The state-controlled metals industry body, China Nonferrous Metals Industry Association, proposed on Monday that the government scoop up aluminum, nickel and minor metals including cobalt and indium, an official at the association and two industry sources with direct knowledge of the matter said.

Wealth Gap in Action: Disposable Lincoln Limousine

A man leaves his Lincoln in a rural Sichuan village two years ago, asking his friend to keep an eye on it. He never comes back for it and nature begins to reclaim the car. He is informed by reporters and doesn't care.

China News: 加长林肯停村道2年多成僵尸车 车主称无所谓

Possible explanation: avoiding a corrupting charge by dumping evidence. More speculative: dumping a vehicle used for one-time large shipment of heroin.

H/T: Chris Buckley 储百亮