Liquidity Evaporates As Credit Conditions Worsen

The PBOC slashed reserve requirements on Sunday and the reason for the cuts are evident in the following days. Kaisa defaulted on Monday and Tuesday, a state-owned subsidiary in Baoding, Hebei defaulted.

Baoding Tianwei set to post China's 3rd domestic bond default Tuesday
China's Baoding Tianwei Baobian Electric Co Ltd said it has not yet raised enough funds to make a bond interest rate payment due later on Tuesday.

If it cannot make the payment by the close of business, it will become the third listed Chinese firm to publicly default on an interest payment to bond investors on an onshore issue.

"As of the time of this announcment, our company has not yet raised the funds to pay interest, and the probability of making the payment has become highly uncertain," a notice posted by the company on the website of China's bond clearinghouse stated.

The firm, a subsidiary of state-owned China South Industries Group Corporation, warned investors on April 16 that it might miss an 85.5 million yuan ($13.8 million) interest payment due on April 21.

Behind the scenes is the troubled credit guarantee industry. Some background on credit guarantee firms from 2014:
Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave
Credit Guarantee Firms Go Down Like Dominoes
Who Broke China Bond Market's No Default Streak? Mutual Credit Guarantees

In Hebei, only about half of credit guarantee firms are still in operation as banks raise their standards for cooperation. The main reason companies are shutting their doors is due to bad economic conditions. These guarantee firms are the lifeblood of small and medium companies who would otherwise be forced into the extremely high interest private lending market, and their quiet contraction is a major deflationary force ripping through the Chinese economy.
21st CBH: 河北地区担保业现状:仅半数正常营业 银行提高合作门槛

And it turns out Baoding Tianwei has credit guarantees too: 保定天威保变电气股份有限公司独立董事关于公司2014年度关联方资金往来及对外担保的专项说明及独立意见
3. As of December 31, 2014, the company accumulated external guarantee balance 258,633,882.26
Yuan, respectively:
(1) is a wholly owned subsidiary of Tianwei change (Hefei) Co., Ltd. guarantee balance transformer 50,000,000.00 yuan; a wholly owned subsidiary of Tianwei change (Qinhuangdao) Transformer Co., Ltd. Tam
Paul balance of $ 50,000,000.00.
(2) for the shares of the company Leshan Electric Tianwei Silicon Technology Co., Ltd. guarantees the balance 139,665,099.10 yuan.
(3) for the affiliates Baoding Tianwei Wind Power Technology Co., Ltd. guarantees the balance 18,973,783.16 yuan, this guarantee is formed prior to the replacement of assets. Bear directly or indirectly, for asset-liability ratio over 70% of the secured object Insurance amount of $ 189,665,099.10, which Tianwei change (Hefei) Transformer Co., Ltd. 50,000,000.00 yuan, Leshan Electric Tianwei Silicon Technology Co., Ltd. 139,665,099.10 Yuan.
The numbers aren't huge, but it shows that behind every bankruptcy in China, there is likely a web of mutual credit guarantees that could pull several, or dozens, of firms into a crisis. At this point, there have been no reports of other firms having guaranteed Baoding Tianwei's credit...

The trouble for China's economy is the under developed financial system. The PBOC can cut the RRR and Li Keqiang can encourage bank lending, but if small and medium companies do not have access, it doesn't help them. Meanwhile, if the credit guarantee market that serves them goes bust, they face tightening credit conditions even as policy shifts to easing.

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