2015-01-19

Bond Investors Start Pricing in Trouble

Bloomberg: Kaisa on Brink of Dollar Default Spooks Money Managers
“The market has been too complacent,” said Raymond Chia, the Singapore-based head of Asia credit research at Schroder Investment Management Ltd., which had $447.7 billion under management as of Sept. 30. Investors would be “rational to adopt a cautious approach in view of the fact that anything can happen, anywhere, anytime. It would be irrational to continue thinking that after Kaisa none of the companies will see a similar fate.”

...Yields on Chinese dollar-denominated speculative grade debt climbed to 12.38 percent on Jan. 16, a Bank of America Merrill Lynch index shows, the highest since June 2012. The junk debt has lost 5.7 percent in 2015, the worst start to a year on record.

Loan investors are also shunning Chinese developers with the bank facilities of Shimao Property Holdings Ltd., Country Garden Holdings Co. and Evergrande Real Estate Group Ltd. quoted at levels that indicate impending stress, according to offered prices compiled by Bloomberg from two traders.

The key point:
Inspectors sent by the central government found property related corruption cases, including misbehavior by officials in land auctions and property development, in all but one of the 21 provinces they inspected since 2013, the official Xinhua News Agency reported Oct. 13, citing the ruling party’s disciplinary body.

Jiang Zunyu was named the target of a graft probe in October, according to Xinhua. Jiang was previously head of Longgang district, the people who spoke on condition of anonymity said. According to company filings, some approval procedures for Kaisa projects in Longgang were suspended last month.

Also: China Graftbusters Put Kaisa Cat Among the Pigeons: Opening Line
For now, investors can only ponder why the government chooses to spook overseas investors at a time of fragility, and how much further it’s prepared to go. To compound the confusion, Shenzhen yesterday became the first city to record an increase in new-home prices for four months in December. (Were they getting ahead of themselves?)

The Shenzhen government now says its restrictions have been over-interpreted: the city government attempted to ease concerns on Friday, saying that blocked sales for China Overseas and another company were part of “normal processing” and didn’t imply wrongdoing by the developers.

We suspected as much. If China Overseas Land is really in trouble, then it’s time to stockpile baked beans, get out the wood-burning stove and dust off our copy of The Coming Collapse of China.

The Chinese media didn't take the government's word for granted. There is still fear that more corruption cases are coming. See: Fear Rises On Concern Land Audit Fallout May Have Only Just Begun in Shenzhen.

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