It's A Depression: Creditors Revolt as Dongbei Steel Defaults For 8th Time

Creditors in Liaoning Province are livid. Serial defaulter Dongbei Steel has done it again, failing to repay the principal and interest on July 19.

Meanwhile, the government cooked up a bailout plan designed to protect its own interests, without any input from creditors:
"Banks were shut out of all meetings the government held to discuss how to resolve the problem, even though they are the largest creditors," an executive with one of the company’s creditor banks, said.

A source close to CDB said that banks "will not implement the plan, because there is no arrangement at all to improve the company’s creditworthiness."

"The plan is all about protecting the government’s own interest as much as possible, with no consideration at all given to the lawful interests of other bond holders," a bond investor said. "It is not feasible at all."
Yesterday, I posted CDB Denies It Asked Regulators to Shut Down Financing to Liaoning Province. It turns out it wasn't only the China Development Bank which requested a shutdown of Liaoning province, but all creditors.

Regarding the latest default, Dongbei is unable to pay 870 million yuan in maturing debt or the 64 million yuan in interest due.

Dongbei Steel reported 229 million in profit in 2015, but receivables stand at 2.3 billion yuan (a problem even if they aren't cooking the books).

Liaoning Province, which is keeping the defaulted Dongbei alive and in its control, has debt of 872 billion yuan, and its debt ratio climbed from about 70 percent in 2012 to 157 percent at the end of 2015.

iFeng: 东北特钢再违约!8.7亿元定向债务未能筹措

Caixin has more details on the creditors' declaration of financial war against Liaoning province.: Investors Seek Liaoning Debt Boycott As Bond Default Battle Heats Up
Bond holders burned by the defaults of a state-owned steel maker in Liaoning province are calling for a boycott of all new bond issuances by the local government and provincial enterprises amid increasing frustration at local officials’ efforts to resolve the company’s debt problem.

They will also ask regulators to suspend the issuance of all debt financing instruments by enterprises in the northeastern province, according to a proposal put together for discussion at an upcoming meeting of investors who hold bonds issued by Dongbei Special Steel Group Co.

Sources with knowledge of the matter told Caixin that all bond investors who plan to attend the meeting have agreed on the proposal.

...But investors say the plan, which was issued last week without consultation with investors or the bond underwriters, is unfair and unfeasible, sources close to the situation told Caixin. Bond holders have accused the provincial government of "failing to do its job."
The proposal:
The proposal calls on the National Association of Financial Market Institutional Investors (NAFMII), which helps the central bank regulate the interbank bond market, to "suspend the issuance of all debt financing instruments Liaoning enterprises" in the interbank market.

It also urges that requests be made to the China Securities Regulatory Commission, the China Banking Regulatory Commission and the National Development and Reform Commission to bar the Liaoning government and all enterprises in the province from using the borrowing channels under their supervision. That would include bank loans and bonds issued not only on the interbank market but also the country’s stock exchanges.

The proposal also calls on "all financial institutions to stop purchasing bonds issued by the provincial government and enterprises."
The bullish (or anti-bearish) case for China says zombie companies are never allowed to default, preventing a systematic crisis or wider defaults. The economy will grow out of the crisis and these firms will either slowly fade away or slowly be nursed back to health, with a final bill smaller than the price of a full bankruptcy today. Bears will argue that delaying/thwarting the process of bankruptcy is even more costly for the economy, but this is mute if the "bull" plan can't even be implemented. Creditors, including government lenders, are already declaring war on an entire province over this strategy.


The warning bell on Liaoning sounded 2 years ago (Liaoning Sounds Warning on Chinese Economy) Liaoning province is now in full blown recession and creditors are revolting. Liaoning, along with the industrial northeast of China, was first in line for a recession because recessions begin in the higher (earlier) stages of production. The global collapse in commodity prices, the drop in crude oil and the recession in Liaoning is all part of the global depression.

Normally, it takes months for a recession in the higher stages to show up in the broader economy, sometimes as long as 18 months. This time around, the decline in prices and economic activity stretches for years, 60 months or more in some cases. Government intervention helped delay the process. Liaoning propped up its economy with real estate investment for a couple of years before the wheels fell off. Now all of China is doing the same. Central bankers and governments in the developed world have taken similar actions. Here's industrial production in the United States:
Retail sales are great in the United States. Consumer sectors (restaurants, retail) and government controlled industries (health and education) are providing much of the job growth in the U.S. Retail sales have also been consistently strong in China, but the recession is only starting to hit the lower stages of the economy in Liaoning. (China's Hidden Depression) The wider depression is still snaking its way through Hayek's triangle, with the slowdown in higher stages such as fixed asset investment still underway. The government is forced into more blatant interventions to keep the economy growing, just as the PBoC is forced to ever increase its liquidity and currency market interventions, even as USDCNY climbs past 6.70 for the first time in years. Eventually, all these interventions across the globe will fail.

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