Here We Go Again: $32 billion in Trust Products Fail

China: $32 Billion Trust Default

Real Estate Trust Issuance Suddenly Cools in July

Real estate is the main driver of trust finance and its cooling sharply. Without offsetting credit growth or stimulus, the economy will slow yet again.

iFeng: 7月份房地产信托发行骤冷
Sogou: Sudden Chill in Real Estate Trust Issuance

Supervision continues to exert its power and the issuing market of the collective trust market is "cooled". Statistics show that the scale of real estate trust fund raising dropped sharply in July compared with the previous month, which may end the boom since 2018. However, the status of basic industry trust has risen after the real estate trust supervision has been tightened.

The scale of issuance has generally declined.

In early July, the China Insurance Regulatory Commission (CIRC) issued a warning to some trust companies whose real estate trust business grew too fast and increased too much. The rapid growth of real estate trust came to an abrupt end. Usufructuary trust data show that 63 trust companies issued collective trust products in July, with a total of 1,632 products issued, a decrease of 20.31% from the previous month. The issuance scale of collective trust products was 184.577 billion yuan, a decrease of 20.22% month on month.

Judging from the issuance situation, the issuance scale of Everbright Trust, which ranks first only, rose 2.48% month on month. However, the other four trust companies in the top five have seen their issuance scale decline to varying degrees.

In terms of product establishment, 59 trust companies established 1,473 collective trust products in July, down 7.06% from the previous month. The establishment scale of collective trust products in the month was 137.071 billion yuan, down 18.9% from the previous month. In July, due to the influence of "policy+window guidance", real estate trust fund raising encountered a "sudden brake" and the establishment scale of the overall collective trust market dropped significantly month on month.

Real Estate Trust Shrinks into Stereotype

In July, the real estate trust raised 58.425 billion yuan, a decrease of 19.63% from the previous month, but the proportion of the real estate trust still ranked first in that month. Since 2019, with the exception of February, which is affected by the long Spring Festival holiday, the scale of real estate trust fund raising in other months in the first half of the year has exceeded 60 billion yuan. The decline in July may be considered as the starting point for the scale contraction of real estate trust.

Industry insiders said that the regulatory requirements for real estate trust continue to tighten, and the contraction of real estate trust business is a foregone conclusion. For some trust companies that rely heavily on real estate trust business, the performance pressure in the second half of the year will be relatively great. Head real estate companies have become "hot cakes". Trust companies will face fierce competition against high-quality counterparties, and the rate of return of real estate trusts is expected to decline.

The scale of basic industry trust increased by 7.31% month on month

Tighter regulation of real estate trust forces trust companies to carry out other businesses to replace them. The continuous policy of "red packets" is an important reason for the growth of basic industry trust against the trend. The foundation scale of basic industry trust increased by 7.31% month on month.

The basic industry trust returned to the upward trend in March, and the product yield remained relatively high. In July, the amount of funds raised by basic industry trust was 36.385 billion yuan, up 7.31% month on month and 2.25 times over the same period last year. The basic industry trust has maintained a good upward trend since the second half of 2018, reaching its peak in March 2019. Influenced by the crowding-out effect of the massive issuance of local bonds and the improvement of local financing environment, the scale and yield of basic industrial trusts both showed significant downward trend in the second quarter. In July, the fund-raising scale of basic industry trust bottomed out and the product income also rebounded.

The status of basic industry trust has risen after the real estate trust supervision has been tightened. Industry insiders said: First, as an important means of counter-cyclical adjustment by the state, the policy effect of expanding investment in infrastructure has begun to emerge, with strong demand for capital in infrastructure and fewer policy obstacles in trust companies' development. Second, the mode of government-trust cooperation is becoming more standardized, and regions with strong fiscal revenue capacity should be carefully selected for cooperation.

It is worth mentioning that in July, the distribution of funds invested in basic industrial trust was distinctive, with economically developed provinces being the first choice, and gradually expanding to the central and western provinces. Jiangsu Province is far ahead with 151 products and has become the hottest area for basic industry trust development, while Sichuan, Shandong, Zhejiang, Guizhou, Hunan and Shaanxi are the second groups, and trust funds are also continuously flowing in.

Suzhou Bank About to IPO, Has Two Defaulted Trust Products

Sina: 苏州银行2笔信托计划投资违约 评级报告提醒关注风险
Sogou: Suzhou Bank Draws Attention to Risks in Two Trust Plan Investment Default Rating Reports

Financial Association (Beijing, Reporter Li May)-Soochow Bank (002966.SZ), which is about to list on A shares, will face certain pressure of development and risk control in its trust and asset management plan in the future.

"Some investments have defaulted, and the future recovery of funds has yet to be continuously observed." On July 16, Joint Credit released a rating report on Suzhou Bank, saying that as financial supervision becomes stricter, attention should be paid to future related risks and the potential impact on liquidity formation.

The above rating report shows that by the end of 2018, Suzhou bank had defaulted on two trust plan investments. the underlying assets were trust loans, namely, 300 million yuan trust loans to Nanjing yurun food co., ltd. and trust loans to Wuxi bosheng asset management co., ltd., with a book balance of 131 million yuan.

Among them, the first trust loan guarantee is guaranteed by the group and the actual controller. At present, this investment has been classified into suspicious categories according to the five levels, and impairment reserves have been accrued according to the proportion of 50%. The second trust loan is guaranteed by the actual controller and his spouse's full joint and several liability guarantee and the commercial real estate collateral guarantee located in Wuxi. At present, this investment has been classified into sub-categories according to the five levels, and impairment reserve is accrued according to the proportion of 25%.

In fact, under the background of strict financial supervision, Suzhou Bank has appropriately controlled the proportion of investment assets (bond investment, trust plan and asset management plan investment, wealth management product investment, etc.) in total assets and adjusted the structure of investment assets in 2018. At the same time, the provision for impairment of receivables investment has been increased. As of the end of 2018, the total investment assets amounted to 98.255 billion yuan, and the balance of impairment provision for receivables investment and available-for-sale financial assets totaled 635 million yuan.

Data show that by the end of 2018, the balance of Suzhou Bank's bond investment, trust plan and asset management plan investment and wealth management product investment were 38.142 billion yuan, 33.014 billion yuan and 15.788 billion yuan respectively. The balance of the first two and the proportion of assets under investment both declined.

It is understood that Suzhou Bank Trust Plan and Asset Management Plan are mainly invested in government financing platforms and state-owned enterprises focusing on infrastructure construction. The regions are concentrated in the locations of Suzhou Bank branches. Counterparties include trust companies, asset management companies, securities companies and fund companies. The average investment period is about two years.


"Suzhou Bank has incorporated trust plan and asset management plan investments into the bank-wide unified credit granting, and the authorization and approval refer to the credit approval process," said the above rating report. It also implements "list system" access classification management, conducts "penetration" analysis on the invested assets according to the principle of "substance over form", and fully sets aside asset impairment reserves for the risky investment assets according to the standard.

However, the rating report also reminds that the trust plan and asset management plan of Suzhou Bank are still relatively large in scale. As the regulatory requirements for interbank financial management and non-standard investment are stricter, Suzhou Bank will face certain pressure in the future development of such businesses.

As of the end of the first quarter, Suzhou Bank had total assets of 315.211 billion yuan and total liabilities of 291.521 billion yuan. In 2018, Suzhou Bank realized operating income and net profit of 7.737 billion yuan and 2.314 billion yuan respectively, up 12.15% and 7.64% year on year. The NPL ratio and provision coverage rate were 1.68% and 174.33% respectively.

The latest announcement of Suzhou Bank shows that it will hold an online roadshow on July 17 and purchase on July 18, with no more than 333 million shares to be publicly issued. "After the A-share listing is completed, Suzhou Bank's capital replenishment channels are expected to be further expanded and its capital strength will be enhanced," the rating report said. Suzhou Bank's main long-term credit and financial bond credit ratings are AAA, and the outlook is stable.

Crackdown: CIRC "Interviews" Real Estate Trusts, Some Suspend Business in Q3

财新：独家|22家信托公司被约谈 地产业务走向何方

A number of senior trustees told Caixin reporters that under the general requirements of supervision, the real estate business of the trust companies currently being interviewed is mainly rectified in three aspects: controlling the growth rate of real estate trusts, prohibiting “pre-finance” business, and channel. Business needs to be filed for approval.

...There were a total of 22 trust companies that were supervised in this round.

　　According to Caixin reporters from a number of trust businesses, the 10 companies interviewed by the China Insurance Regulatory Commission are Zhongrong Trust , AVIC Trust , Industrial International Trust , Bank of Communications International Trust , Everbright Trust , Minmetals Trust , and Barry Trust . Jiangsu Trust , universal Trust , national communications care ; 12 interviewees Beijing Insurance Regulatory Bureau silver company CITIC Trust , China Credit Trust , foreign trade Trust , great Britain and trust , COFCO Trust , Huaxin Xin care , livelihood trust , Jingu Xin care , SDIC Taikang Trust and so on.

Regulators are cracking down on pre-financing that gets the ball rolling for development projects:

In recent years, several trust companies in Beijing, such as CITIC Trust and China Credit Trust, have used the model of specific asset income rights to do a lot for real estate developers. business. This model mainly uses the trust funds in two phases. In the early stage, it invests in the equity rights of specific assets such as the equity income of the project company. After the funds are collected, it helps the real estate enterprises to obtain the land certificates and then invests in the development and operation projects.

　　These “pre-funding” businesses are often active collection management trust plans, which are subscribed by qualified investors. According to Caixin reporters, from the informed sources, under the guidance of the supervision window, the “pre-finished” collective trust plan that has not been filed has been directly suspended; the offenders are costly and will be subject to regulatory penalties.

　　Since the procedures of the trust plan are to be filed after successful recruitment, some trust companies have to process the trust plan that is being raised and has not been successfully filed. According to the Caixin reporter, Everbright Trust, CITIC Trust and SDIC Taikang Trust have all removed some products. Among them, a CITIC Trust product sold by China Merchants Bank and a product of SDIC Taikang Trust were suspended for refund.

　　A middle-ranking bank involved in the matter told Caixin reporter that the trust products that are generally raising funds have been negotiated with real estate companies. Now they are required to refund, which will directly affect the financing of housing enterprises. Although regulation does not take a “one size fits all” approach to real estate trusts, it will trigger a chain reaction of financial institutions, which is worth noting.

　　As Zhou Chuangnan, an analyst at Huachuang Securities , pointed out, although the proportion of trusts in real estate investment sources is not high, the importance of trust financing in the real estate sector is significant. The key point is that the real estate is highly leveraged. The key role of trust in front-end financing.

China Crackdown on Real Estate Trusts Following Scandal

iFeng: 坚持“房住不炒” 银保监会严查房地产信托！
Sogou: Insist on "Housing Not to be Fired" Bank Insurance Regulatory Commission Closely Inspects Real Estate Trust!

It never rains but pours.

Recently, the whole real estate market has been greatly impacted. The main impact comes from Xincheng Holdings. The scandal of its chairman has caused the listed companies of "Xincheng Series", whether listed in Hong Kong or listed in A shares, to drop to a limit or even to fall off a cliff. The market value has evaporated by more than 40 billion yuan. People have great doubts about the continuation of the capital chain behind it.

China Banking Regulatory Commission Interviews Trust Companies

At the same time, China Banking Regulatory Commission began to interview trust companies, demanding that over-expanded trust companies restrict investment in real estate.

This background can actually last until last month. Guo Shuqing, chairman of the China Insurance Regulatory Commission, made a clear analysis of the real estate market at the Lujiazui meeting last month and drew two conclusions. One is that the debt of Chinese residents has reached an unsustainable level and the burden is heavy. Second, more than half of the new loans are now mortgages, which is also unsustainable, indicating that the financialization of real estate has become very serious.

In fact, the bank has already done layers of control, and has a certain degree of restriction on developers and mortgages. Therefore, in the end, everyone found a trust company to bypass the bank when looking for funds. As a result, the trust company's business in the past two years has mainly been mortgage loans or real estate development. At present, the CIRC will also control these fast-expanding trust companies for interviews and once again strengthen the wind control over the entire market.

The trust companies interviewed this time include Zhongrong Trust (the largest trust company in China), AVIC Trust, Jiangsu Province International Trust, Wanxiang Trust, Xingye Trust, Jiaoyin International Trust, Everbright Trust, Minmetals Trust, Berry Trust and Guotong Trust. Except Zhongrong Trust, other trust companies are professional trust companies or trust companies with relatively limited scale. The more such companies are, the more radical their business development in real estate tends to be.

Therefore, the CIRC has put forward five requirements for these trust companies: first, strictly implement the real estate market regulation policy and the current real estate trust supervision requirements; Second, improve the level of risk management and control to ensure that the scale and complexity of the business matches its own capital strength, asset management level and risk prevention and control capability. Third, raise the awareness of compliance, strengthen the construction of compliance and ensure the steady development of real estate trust business. Fourth, control the growth rate of real estate trust business and keep the growth rate and increment of real estate trust business at a reasonable level. Fifth, improve the entrusted management ability, actively optimize the real estate trust service mode, and provide professional and characteristic financial services for real estate enterprises. After all, the most important thing for these requirements is to control the growth rate of real estate trust.

Regulatory layer strictly controls risks and promotes development

Real estate trust, in fact, is a real estate fund trust, which refers to the act that the client entrusts the legally owned funds to the trust and investment company, and the trust and investment company invests the funds into the real estate industry and manages and disposes of them.

Real estate trust can not only bring benefits to clients, but also is one of the financing methods in China's real estate industry. Because China's real estate development funds are mainly self-raised funds and other funds, of which the deposit and advance payment account for the highest proportion, and the rest are mainly financed.

Real estate business is an important part of trust investment. From June 2018 to June this year, the monthly establishment scale of real estate trust has ranked first in collective trust for 13 consecutive months, becoming an important business for trust companies.

Judging from last year's data, although the overall scale of the trust industry is declining, the scale of real estate trust is rising against the trend. By the end of May, the balance of real estate trust assets was 3.15 trillion yuan, accounting for 14% of the total trust assets. An increase of 166.597 billion yuan over the beginning of the year, up 15.15% year on year.

In short, the real estate trust business is growing too fast, which has attracted the attention of the CIRC. For some trust companies that rely on real estate trust business, the performance pressure in the second half of the year will be greater. As for the real estate sector, the market generally expects that the financing environment for housing enterprises will be further tightened and the pressure on capital will be further increased. As far as the market is concerned, strong supervision is helpful to promote trust companies to return to their original sources, optimize their structure and transform. However, short-term pain in the market is inevitable.

CITIC Guoan Isn't Paying Its Bills

I saw a Chinese headline this morning about Bank of Beijing having to make good on its credit guarantee of Citic Guoan. I did a search for news in English and didn't find anything yet, but did find they also triggered a credit guarantee in March, have a real estate "property-tech" subsidiary accused of not paying their bills and they were aggressive in taking stock-pledged loans. Citic Guoan is separate from Citic, but the latter still has a substantial stake in the company.

March, Caixin: Bank of Beijing Stuck Making $5.81 Million Payment on Debt It Guaranteed

Bank of Beijing has had to pay some 39 million yuan ($5.81 million) in interest on behalf of Citic Guoan Group Co. Ltd., as it serves as guarantor of 2.5 billion yuan of the company’s debts.

The lender said in a stock exchange filing that it signed off as guarantor for the principal and interest from Citic Guoan’s 2.5 billion yuan debt investment plan to finance the renovations of some old buildings in the capital.

June, Mingtiandi: LANDLORDS ACCUSE CITIC-BACKED PROPTECH PLATFORM OF NOT PAYING RENT

China’s property innovators are hitting the headlines again this month as a property marketing and management platform tied to one of the country’s biggest investment conglomerates is reported to have defaulted on its financial commitments.

A long-term rental housing business operated by Guoan Family, an affiliate of state-linked CITIC Guoan Group, has been accused by landlords of not paying rent on the apartment that it leases to tenants, according to an account by the local media.

Today, Caixin: 中信国安25亿债权违约 担保方北京银行全额埋单
(Bank of Beijing, the guarantor of citic guoan's 2.5 billion creditor's rights default, pays the full bill)

Citic Guoan Group's 2.5 billion yuan debt default was eventually "paid" by advances from the guarantor Bank of Beijing. On the evening of June 21, the bank of Beijing (601169.SH) issued a notice announcing that it would fulfill its guarantee responsibility for all principal and interest.

The Bank of Beijing said that after the advance under the guarantee, the guarantee business was terminated, but this did not mean the formation of final losses. At present, the Bank of Beijing has taken a number of asset preservation measures for the business. The book value of the preserved assets can cover the risk of the advance, which has played a role in mitigating the risk of the business. The Bank will fully safeguard the legitimate rights and interests of the bank through recovery from the debtor and other means.

The 2.5 billion yuan debt plan of CITIC Guoan Group has a total of five years. The original maturity date is 2020 and the annual interest rate is 5.6%. CITIC Guoan Group has previously promised to pay interest on a quarterly basis. The source of repayment is the comprehensive income of CITIC Guoan Group. The 2.5 billion yuan will be used for land removal, shareholder loan repayment and supplementary working capital for the cotton patch rebuild project in citic guoan.

The initial credit report issued by United Credit Rating Co., Ltd. shows that the credit rating of the return right of the investment plan is AAA, and the credit rating of the debt paying subject is AA+. The Bank of Beijing has provided it with an unconditional and irrevocable joint and several liability guarantee for the full amount of principal and interest.

However, in the first quarter of this year, an insurance asset manager told Caixin that his 2.5 billion yuan insurance asset management debt plan held by CITIC Guoan Group could not pay interest. The bank of Beijing, as the guarantor, paid 39.453 million yuan in interest on behalf of citic guoan after negotiation. (See Caixin.com's report "Citic Guoan Group's 2.5 Billion Credits Owe Interest Will Bank of Beijing Pay? 》）

It is worth noting that the creditor's rights investment plan has an accelerated maturity clause. If CITIC Guoan Group fails to pay interest on the investment funds within six months from the first interest payment date (March 12), the creditor's rights investment plan will mature ahead of schedule, with the maturity date being September 3, 2019.

According to the latest announcement of the Bank of Beijing, on May 27, 2019, the creditor's rights investment plan will expire ahead of schedule after being voted by the beneficiaries' meeting under the plan. On June 20, due to the failure of CITIC Guoan Group to make its own payment, Bank of Beijing, as the guarantor, voluntarily fulfilled its guarantee responsibility for all principal and interest according to the terms of the guarantee. "Under this business, the Bank voluntarily fulfilled its guarantee obligation, which is conducive to locking up risk exposure and pursuing recovery from the debtor in accordance with legal provisions and relevant legal agreements".

Since 2019, the turmoil in citic guoan has continued. On January 7, a debt dispute between CITIC Guoan Group and Beijing Zhongguancun Bank led to a court freeze of 300 million yuan. On January 10, citic guoan MTN004 plunged sharply, almost halving. In addition, creditors have applied to the court to freeze the assets of CITIC Guoan Group for preservation. (See "citic guoan's Troubled Group Executives Trapped in Vortex" for details).

Citic was heavily involved in making stock pledged loans:

In the successive crises, citic Guoan group, on the one hand, tried to coordinate its relationship with creditors in the hope of reaching a settlement, and on the other hand, it sent a distress signal to the original major shareholder China citic group co., ltd. Before the Spring Festival in 2019, CITIC Group had already reported the situation of CITIC Guoan Group to the Ministry of Finance. Subsequently, CITIC Group set up a high-level working group to deal with the problems of CITIC Guoan Group. The reorganization is imminent. (For details, I heard that "it is difficult for the citic guoan storm to be leveled and CITIC Group to help it out").

At present, there are three A-share listed companies under CITIC Guoan Group, including citic guoan (000839.SZ, holding 36.44% of shares, with a cumulative pledge of 99.37%), Baiyin Nonferrous (601212.SH, holding 32.27%, with a cumulative pledge of 99.89%), and Citic Guoan Wine (600084.SH, holding 32.72%, with a cumulative pledge of 89.15%), most of which have been pledged. On June 21, citic guoan closed up 2.61% at 4.32 yuan/share, Baiyin Nonferrous Metals closed up 1.50% at 4.74 yuan/share, and ST Citic Guoan Wine closed up 4.89% at 2.36 yuan/share

Bloomberg: China Looks for a Savior in the Shadows

Beijing has invited non-bank financial institutions to play a larger and more formal role in the aftermath of the first regulatory takeover of a commercial lender in two decades. Interbank rates have ballooned since the seizure of Baoshang Bank in late May, raising funding costs for financial companies. This week, the central bank asked its biggest state-owned banks to support large brokerages such as Citic Securities Co., Huatai Securities Co. and China International Capital Corp

...As a cash crunch looms, it’s worth asking why the central bank suddenly cares about brokers’ funding channels. Citic Securities, for instance, has only 673 billion yuan ($93 billion) in assets, in line with a mid-size regional bank. It’s also questionable whether brokers deserve bigger credit lines, considering their aggressive over-the-counter margin financing helped engineer the stock market’s spectacular boom and bust four years ago.

...When money is tight, company founders often pledge their shareholdings in exchange for loans from securities firms. This is a unique feature among China’s brokers, with trillions of yuan of such loans outstanding. Citic Securities, for instance, expanded this business to 25.9% of its total equity at the end of 2018, while smaller brokers such as Everbright Securities Co. more than doubled such loans since 2016.

Reuters: Citic Guoan Wine Says Controlling Shareholder's 34.5% Stake Frozen By Court To Date

Tip of Iceberg Hit: Chinese City Overdue on Illegally Raised Shantytown Renovation Shadow Loans

JRJ: 又一个城投违约了--地方债务危机下的缩影

Recently, the special subsidiary of the China Post Fund initiated the establishment of a special subsidiary of the first-class light management, "First-class light control, Southeastern Kaihuang Asset Special Asset Management Plan No. 1" was overdue, and the financing party was Guizhou Qiandongnan City Investment Corporation.

　　According to the public information, the product was issued to the borrower, Southeastern Kaihong Assets Operation Co., Ltd. (hereinafter referred to as Kaihong Assets) through the Kaili Yingbin Branch of Guizhou Bank, and finally used for the transformation of the shantytowns by a subsidiary of the Qiandongnan Government (autonomous prefecture in Guizhou).

Recently, the city's repayments have been frequently overdue. Last month, the Federal Reserve Securities-Jiangsu Securities-Jiangrong No. 1 Collective Asset Management Plan was overdue. The main body of the plan financing is Inner Mongolia One City Investment Company - Inner Mongolia Kerqin City Construction Investment Group Co., Ltd.

Maybe this is why CDB too over funding of shantytown renovations from local branches?

In fact, this is just the tip of the iceberg of local invisible debt. In the past, some local governments used the PPP and government purchase of services to illegally raise money. Of course, including the above-mentioned concerns, the shed reform loans have brought hidden troubles to local hidden debts.

The monetization of sheds has increased the hidden debt risk of local governments to a certain extent. Only by returning to the nature of "shed reform", the local government debt in the shed reform will gradually become "visible", and the government leverage ratio (i.e. government debt/GDP) will be closer to the true level.

Another arrow pierces the heart of the "but China's government debt-to-GDP ratio is low" argument.

However, while solving the problem, you can't be too hasty, otherwise there will be systemic financial risks.

　　Today, the Ministry of Housing and Urban-Rural Development stated that it will promote the monetization of sheds in accordance with local conditions and do not make a one-size-fits-all approach.

　　The Ministry of Housing and Urban-Rural Development said that in places where commodity housing stocks are insufficient and housing prices are under increasing pressure, the shed-reform resettlement policies should be adjusted in a targeted manner, and more ways of newly-built shed-renovation houses should be adopted; where commodity housing stocks are large, Continue to promote the monetary resettlement of the shed.

How much debt are Chinese local governments hiding off balance sheet?

Huge implicit debt

　　Up to now, the national local government debt balance has reached 16.2 trillion yuan. From the perspective of statutory limits, the risk of government explicit debt is not high, but if implicit debt is considered, the local debt is very large.

In April this year, the Auditing Department’s “Tracking Results of the Implementation of Major National Policy Measures in the Fourth Quarter of 2017” showed that six cities and counties in five provinces issued a letter of commitment, financing lease, and signed an engineering government purchase service agreement. In other ways, the debts were disguised and the government’s implicit debt was 15.422 billion yuan.

　　Part of the disguised debt here is the local financing platform, including the city investment company to endorse the government credit endorsement. Since its inception, City Investment Corporation has not been a fully market-oriented company, and it has inextricably linked with local governments.

However, under the regulatory crackdown, financing is tight, from the perspective of the policies introduced, local governments will no longer endorse such platforms, breaking the redemption (defaults), and the harm caused by these invisible government debts will also emerge.

Referencing this table:

Jiangsu, which has the highest government debt, is followed by Shandong, followed by Zhejiang, Guangdong, and Guizhou. However, considering local GDP and fiscal capacity, according to Tianfeng Securities, the debt ratio (the proportion of government debt to GDP) is 52% in Guizhou, and Qinghai, Yunnan, Inner Mongolia and Liaoning are higher than 30%. In terms of the ratio of government debt balance to comprehensive financial resources, Guizhou has the highest rate of 86.6%, followed by Yunnan Province with 85.2%, and Liaoning, Shanxi, and Inner Mongolia with more than 70%.

　　But in reality, this is only a visible debt, we must also consider a hidden debt.

Guizhou moved up from 31st out of 31 provinces in 2014 GDP per capita, to 29th in 2017.

Up to now, the government's explicit debt scale reached 29.95 trillion, of which the central debt was 13.77 trillion, the local debt was 16.18 trillion, and the total debt accounted for 36.2% of the national GDP. From the perspective of statutory limits, the risk of government explicit debt is not high, but if implicit debt is taken into account, the scale of local debt is very large.

Growth of local government debt in the past 10 years.

Since the real debt data is in the hands of local governments, it is not disclosed. At present, there is a lack of complete, accurate and persuasive statistics on the scale of local debts. However, the scale of local debt has become a consensus. Some scholars estimate that the size of implicit debt of local governments is about 2-3 times that of explicit debt.

Or 100 percent of local GDP. And if you add up all the local GDPs together, it is 100 percent of national GDP.

"Finance" (blog, Weibo) recently said that the relevant departments of the central government are studying and formulating documents to prevent and control local government debt risks, including the identification, mapping and resolution of implicit debts. In the next step, the relevant central ministries and commissions are expected to introduce unified standards and standards for the implicit debt of local governments, and will also launch a series of symptomatic drugs to resolve the hidden debts of local governments, so as to avoid the risk of debt out of control.

　　As localities begin to map out hidden debts, more and more hidden debts will become explicit.

The estimates of 3 times GDP comports with the number mentioned in a piece earlier this week, History Repeats: Chinese City Tells Banks to Lend To City LGFV or Else. The amount of debt in local government funding vehicles could be 60 percent of GDP or 3 times official local government debt. However, if the Qiandongnan government illegally raised funds, that estimate might be a conservative one.

State-Owned Yingkou Port Avoids Default

iFeng: 光大永明营口港债权计划未违约：营口港如期偿付本期本息

Unprecedented, Everbright Yongying Yingkou PortThere was no default in the debt plan. On June 20, Everbright Asset Management Co., Ltd. confirmed that Yingkou Port Group Co., Ltd. has allocated all principal and interest of the current period to the escrow account of “Guangdong Everbright-Yingkou Port Debt Investment Plan” on June 20, 2018 in accordance with the contract. . Previously there were media reports that Yingkou Port Group Co., Ltd. (hereinafter referred to as “Yingkou Port Group”) was unable to repay the principal and interest due for the “Guangdong Everbright-Yingkou Hong Kong Creditor’s Investment Plan” for more than RMB 530 million.

Prior reports said the port could not pay back a trust loan, covered here and here. Shares of Yingkou Port fell 22 percent in the past 5 trading days.

Update: AA+ Rated Yingkou Port Defaulted on ￥530 Million, Has ￥78.1 Billion in Debt

Last week I posted State-Owned AA+ Rated Yingkou Port Defaults on 530 Million, Has 68.7 Billion in Debt. I could find no English coverage of the story. As of today, I only find a small mention in Asia Insurance Review: At least 10 insurers involved in at-risk Yingkou Port debt investment plan. It mentions only the ￥530 million yuan default.

I was surprised about the lack of coverage given it is a AA+ rated state-owned enterprise (Dagong rates U.S. sovereign debt as BBB+). A week ago I posted in-depth research from Changjiang securities slicing and dicing the Chinese bond market and areas (industries, provinces) with increased default risk. The chart below shows the share of bonds issued below AA rating and the issuer. Private enterprises (red) and other (blue) are dwarfed by SOEs (yellow). The right hand side shows the total percentage of less than AA debt issued. There may or may not be a lot of debt with similar risk out there going by credit ratings.

Here's Dagong's (red) and China Bond Rating's *blue) rating history for Yingkou:

Last week the total debt was reported as ￥68.7 billion. The latest coverage from Sohu says ￥78.1 billion. The headline says: the creditor lineup is quite luxurious!

Sohu: 781亿债务！AA+省属国企营口港违约，债权人阵容相当豪华

According to Yingkou Port’s own statement, in the process of Liaoning port integration, the company’s financing activities have all but ceased, and the temporary funds are tight. Therefore, it is hoped that Everbright’s reorganization plan will be adjusted.

According to relevant media reports, Everbright's debt plan for Everbright has 14 beneficiaries, of which 13 are insurance companies and a total investment of 1.7 billion yuan; the other is Haikou Branch of China Everbright Bank Co., Ltd. with an investment of 300 million yuan.

The 13 insurance institutions were China Life Insurance (subscribing 450 million yuan), China Ping An Life Insurance (subscribing 240 million yuan), China Pingan Property & Casualty Insurance (subscribing 0.6 billion yuan), Xinhua Life Insurance (subscribing 200 million yuan) and Taikang Life Insurance (subscribing) 100 million yuan), Indochina and Life Insurance (subscribing 150 million yuan), Indochina and P&C Insurance (subscribing to 50 million yuan), United States-China United Metropolitan Government (subscribing to 50 million yuan), and ICBC Ansheng Life Insurance (subscription of 100 million yuan) ), CCB Life Insurance (subscription RMB 50 million), Taiping Life Insurance (subscription RMB 100 million), Huatai Property Insurance (subscription RMB 50 million), and Huatai Life Insurance (subscription RMB 100 million) .

Such a luxurious lineup can be said to cover more than half of the insurance circle. The reason that the original insurance fund purchased this debt investment plan was in addition to the AA+ rating of Yingkou Port, another very important factor is that the Bank of China has undertaken irrevocable guarantees, and Chinese banks is exposed. Naturally, investors are not worried.

The resolution of Yingkou Port's debt restructuring could set the model for other defaulted Liaoning firms:

“Yingkou Port is not without money. It involves an overall debt restructuring. From the perspective of publicly disclosed information, it is the immediate repayment of bonds and the reorganization of debt for non-bonds,” said the person in charge of the insurance industry. The Economic Observer reporter said that in this process, Everbright's debt plan was allocated to non-bond debt , but in the eyes of the beneficiaries of the Everbright asset management and credit plan, the investment plan should not be divided according to the nature of the business. Included in the debt-to-equity swap.

The reason is very clear. It means that Yingkou Port intends to redeem all standardized bonds. However, such non-standard products as Everbright's debt investment plan are intended to convert debt into shares.

Wrote here, readers and friends, did you think of Liaoning Northeast Steel, open bondholders meeting, disregard the opposition of many investors, forced the implementation of debt-to-equity swaps, or GKX Proposes a line of three will suspend all LN Regional bond approvals.

The same story may be staged again in Liaoning's land.

The Sohu article also discusses another worrying aspect of the Yingkou default: good assets were stripped.

This is not, good financial assets are also being stripped : In December 2017, the State-owned Assets Supervision and Administration Commission of the city of Shangkou City approved the equity of three unlisted financial institutions held by Yingkou Port Group and its subsidiaries (Shenyang Rural Commercial Bank Co., Ltd. 10 %, 10% of Dalian Rural Commercial Bank Co., Ltd., and 14.6% of Yingkou Rongsheng Rural Commercial Bank Co., Ltd.) were transferred to Yingkou Venture Capital Guidance Fund Co., Ltd. and Yingkou Huiying SME Sustainable Development Services Co., Ltd. The audit base date for this free transfer was December 31, 2016. The total value of the equity transferred was RMB 1.253 billion , accounting for 3.6% of the owner's equity of the Yingkougang Group's audited consolidated financial statements for the 16th year.

We will wait and see how the development of Yingkou Port continues.

Default Fears as Yunnen Developer Misses Payment, Desire for "Last Mile" of Default Process

A Yunnan real estate developer missed its payment when a 2-year trust loan matured in May, but according to Chongqing Trust it has been repaid in full and there was no official default. The story gained attention with heightened investor fear over small and mid-sized developers.

Elsewhere, some in the financial sector are calling for market resolutions for defaulted bonds. The government still frequently intervenes, short-circuiting the default process with a bailout. The industry would like to see the market and legal system play a larger role in defaults.
Sina: 云南房企出现信托违约？重庆信托：全部本息已付清

Recently, a number of media reports said that Jingpeng Real Estate, a subsidiary of Yunnan Real Estate Development and Management (Group) Co., Ltd. (hereinafter referred to as “Provincial Housing Group”), due to the outstanding payment of 300 million yuan in trust debts, will trigger the private equity bond “17 provinces. The housing debt "investor protection contract clause may lead to advance payment of 500 million yuan bonds. For a time, the market's risk of repayment of the housing enterprises was "very loud." In this regard, "Securities Daily" reporter contacted the Chongqing Trust, the company's insiders said that all the principal and interest of the relevant trust debt has been paid, there is no violation.

...The report shows that the provincial housing group invested 54.12 million yuan in Jingpeng Real Estate and holds 51% of the equity. Jingpeng Real Estate has been included in the provincial housing group consolidated statement since November 2017. On May 26, 2016, Jingpeng Real Estate applied for a trust loan of RMB 300 million from Chongqing Trust. The borrowing period is 2 years and expires on May 26, 2018.

　　The report stated that since May 26, 2017, Jingpeng Real Estate has experienced a shortage of funds due to the change of the real estate market, resulting in a shortage of funds and failing to repay the principal and interest according to the loan contract. As of May 26, Jing Peng Real Estate's borrowings have all expired, only repaying the principal amount of 0.2 billion yuan, and the total principal and interest owed to the company are RMB 330 million.

　　According to the “17 Provincial Housing Debt” Prospectus issued by the Provincial Housing Group in 2017, “The default or grace (if any) of the debts of the issuer or the consolidated company’s debts is due after they are due, which is regarded as an event of default , need to start the investor protection mechanism." The trustee shall, within the fifteen trading days, convene the meeting of the holders within the fifteen trading days in accordance with the time limit agreed in the trust management agreement. If the provincial housing group's subsidiary is in default, it will trigger a cross-default clause of RMB 500 million in private debt.

　　The "Securities Daily" reporter contacted Chongqing Trust at the first time. An insider of the Chongqing Trust stated that all principal and interest involving the trust debt had been paid and there was no breach of contract. Under this circumstance, the provincial housing group’s RMB500 million private placement debt may also receive a “safety mat”, which does not constitute an issuer’s breach of the agreement under this period of corporate bonds.

Another stories discussion the change in investor perceptions around bond risk and default. No more buying bonds with "eyes closed."

Sina: 打破刚兑渐成债市共识 违约处置最后一公里仍待打通

From the perspective of a number of investment institutions that a number of factors led to the recent rise in the credit market risk.

　　On the one hand, the current overall financing environment has become tight. Financing companies with weak qualifications lacking sufficient cash flow have become more difficult and the risk of default increases. On the other hand, including the new regulations on asset management, the implementation of a number of regulatory policies has led to a weakening of the overall demand for credit bonds and a decline in investor willingness to hold them.

　　The successive breaches of the coupons also made the credit risk market’s overall risk status and future performance highly regarded.

　　According to data from the Shanghai Stock Exchange's bond business center, the default rate of unexpired corporate bonds on the SSE bond market is about 0.2%, which is relatively low. The default amount of defaulted bonds is small. In respect of listed corporate bonds with a high degree of market attention, the issuer has a rating of more than AA+ or above for 70% of state-owned companies or entities, and the qualifications are relatively good. The risk of outbreaks is also relatively small.

what's that rating worth? Earlier today State-Owned AA+ Rated Yingkou Port Defaulted on 530 Million, Has 68.7 Billion in Debt.

In response to this, the exchanges that have assumed first-line regulatory responsibilities have begun to respond in advance. It is reported that at the beginning of the year, the Shanghai Stock Exchange has specifically requested the trustee to carry out risk investigations on key industries or other high-risk issuers that expired or sold back to bonds this year, explore the risk base, and deploy and implement risk management in advance.

...In fact, risk prevention and control have always been the “emphasis” of credit bond market supervision. Information from the Shanghai Stock Exchange Bonds Business Center shows that in recent years, the Shanghai Stock Exchange has intervened in a timely manner through risk monitoring, investigation, and other means to assist bond issuers and trustee managers in formulating targeted disposal plans. As of now, the SSE has coordinated more than one resolution.

...In the eyes of the industry, the above situation indicates that the era of “buying bonds with closed eyes” has passed, and that “breaking up” has gradually become the consensus of the bond market participants. The gradual establishment and strengthening of the market restraint mechanism will help reverse the current situation in which the credit bond pricing and risk matching are not high.

　　The industry at the same time called for the “last mile” of breach of contract to be opened up in the process of credit debt becoming more market-oriented and legal.

　　Judging from the current situation, there is a strong local government intervention in the handling of bond defaults, and the result is that the credit risk has been delayed or shifted, but has not been effectively released. A number of industry experts have called for all parties to accelerate the market-based risk management of credit bonds, including improving the trading system for defaulted bonds, in order to facilitate the market to clear, in light of the initial consensus reached by all parties on the “breaking down” policy.

On this basis, the bond market risk management system framework and market infrastructure construction should also be further improved, including market-based issuance pricing, credit risk management, debt repayment risk reserve, credit rating and credit enhancement, valuation, market makers Institutions, third-party guarantees, information disclosure, etc.

Fading Shadow Banking

Some discussion by analysts about the drop in shadow banking last month. Credit growth from public infrastructure slowed in May, credit to consumers increased. Credit is tightening because there was less of an offset from on-balance-sheet lending than in prior months.

iFeng: 5月社融增量腰斩背后：非标已死还是宏观经济警钟？

Overall, the social financial data in May sounded the alarm for the macro economy and also challenged the current regulatory policy. If social finances continue to remain weak, the toughness demonstrated by the Chinese economy in the past few months will be difficult to sustain. Under the credit environment, the lack of corporate financing will further stimulate credit defaults, which in turn will prompt financial institutions to tighten financing conditions and create a vicious cycle. The risk of risk management will increase significantly, and regulatory policies will need to make appropriate adjustments.

The monetary policy may continue to push down the RRR, so as to encourage banks to provide credit. However, the slow return of debt and the lack of bank capital will not be able to solve the problem for the time being. The high credit risk will also reduce the willingness to provide credit. In the short term, the regulatory policy Before a modest adjustment is made, the economic downturn is expected to resume and the bond market is expected to be supported. The only certainty is that the central bank will not rashly tighten liquidity at this time.

Hai Tong Jiang Chao, Liang Zhonghua: Non-standard bonds shrank, and social financial growth continued to fall!

1. Social growth rate continues to fall.

In May, the total amount of newly-added social financing totaled 760.8 billion yuan, a deceleration of 302.3 billion yuan year-on-year, and the growth of the stock of social financing continued to drop to 10.3%. From a structural point of view, off-balance-sheet non-standard financing continues to shrink, with commissions, trust loans, and undiscounted bank acceptance bills continuing to decrease by more than RMB420 billion in May, a slight increase of RMB450 billion year-on-year, which remains a major drag on social financial growth. As bond market adjustments and credit default incidents increased, the net financing of credit bonds in May decreased by 43.4 billion, which weighed on social and financial growth. Only loans to entities increased by 1.14 trillion yuan, but also by 38.4 billion yuan year-on-year, indicating that the vast majority of financing needs are difficult to transfer from the balance sheet to the table.

2. Corporate financing continues to decline.

In May, new loans from financial institutions reached 1.15 trillion yuan, an increase of 40.5 billion yuan year-on-year. Among them, loans to residents increased by 614.3 billion yuan, which was basically the same as that of the same period of last year. However, residents' long-term loans still decreased by 40 billion yuan year-on-year, reflecting the impact of cooling real estate sales. In May, corporate middle and long-term loans grew by 403.1 billion yuan, a deceleration of nearly 40 billion yuan year-on-year. Given the impact of local debt swaps, this growth rate was not low, but due to non-standard corporate bonds, bond financing fell sharply, and financing in the broader corporate sector increased. The speed continued to decline sharply.

3. M2 growth rate remained flat at 8.3%.

Social financial growth slowed down and money creation activities slowed down. However, fiscal deposits were slower to repatriate than in the same period of last year. In May, the year-on-year growth rate of M2 was 8.3%. In the context of the policy of controlling macro leverage ratio, the overall financing environment has tightened, and it is expected that M2 will maintain its low growth status. May's M1 growth rate was 6% year-on-year, and M0's growth rate was 3.6%, continuing its downward trend.

4. Financing is still declining and the economy is under pressure.

Since the beginning of the year, financial supervision has completely blocked non-standard financing and channel operations. At the same time, it has blocked the “back door” and opened the “main entrance” through floating deposit interest rate ceilings, RRR cuts, and MLF guarantee expansion to support entity loan and bond financing. However, in the context of strict supervision, there is a certain difficulty in the transfer of existing non-standard financing to on-balance sheet loans and bonds, and the overall social financial growth rate will continue to decline. In the short term, the rebound in economic production in April and May was mainly due to the fact that this year's recovery and start-up were relatively late, and production was released in the short term. There was a new “seasonality”. However, the fall in financing will inevitably put pressure on the economy, and this pressure will be more obvious in the second half.

China Gold Futures, Chen Jianheng, Dan Tanghua, and Zhu Weikang: Social capital falls, loan ratio rises, economic aggregate is not weak but structural differentiation

The more-than-expected financial data in May was that social financial data was significantly lower than expected, while loan growth and M2 growth generally had little deviation from market expectations. The shrinking of social financing is mainly under the background of strict supervision this year. Non-standard and bills continue to shrink, which is a normal effect of policy control. In addition, this year, PPP and urban investment platform financing tightened, infrastructure investment slowed down, and capital requirements It has also weakened, and it is also one of the reasons for the weakening of social finances. In terms of loan structure, the weaker increase in public loan in May also reflected this decline in financing demand to some extent. Looking at this year, the proportion of loans in social financing continues to rise. This year's cumulative increase has accounted for more than 87%, which has become the main tool to support financing. In addition, the increase in overseas bond financing this year partially compensated for the decline in domestic financing. On the whole, with the shrinking industry peers, slower financial management, and more financing back to the table, this year's mainstream trend is difficult to reverse.

Although the growth rate of social financial resources has declined, the growth rate of social financial balances remains at a level slightly higher than 10%, still higher than the growth rate of GDP. Judging from the macro data, the overall economy is not weak at present, but the structural differentiation is obvious. The prosperity of the upstream and middle industries is high, while the downstream is weak. In addition, the financing of state-owned enterprises is relatively more secure, and the difficulty of financing for SMEs has increased. Therefore, the division of enterprises this year has also significantly increased. Given that deleveraging is the main tone of the policy, we expect no apparent relaxation of monetary policy or financial supervision policy. However, in order to ease local pressure, there may be targeted fine-tuning policies. The macro aggregates are not weak, and the micro-differentiation is intensifying, which makes the bond investment level need to pay more attention to different types of bonds. In particular, the yield curve becomes steeper, credit spreads widen, and interest rates also divide accordingly. The interest rate debt will be the most secure investment strategy.

1. New loans are basically in line with expectations and weak to the public

In May, new loans amounted to 1,150 billion yuan, of which, social financing loans totaled 1,140 billion yuan, basically in line with expectations, and current loan demand remained strong. Structurally, short-term loans and bill financing increased by RMB 308.2 billion during the month, which was higher than the same period of last year. Net long-term loans increased by RMB 795.4 billion, slightly lower than that in April and the same period of last year. The recovery of bill financing was new loans over last year. The main reason for the same period. Compared with the same period of last month and the same period of last year, the proportion of residential loans increased (from 45% in the previous month to 53%), slightly weaker against public loans (accounting for 46% of the previous month's decline from 49% in the previous month). This is related to the decline in infrastructure financing and the tightening of supervision. With limited mortgages, the growth rate of medium and long-term residents' loans is limited, but short-term loans continue to rise. Specifically, residents' short-term loans increased by 222 billion yuan (up 44 billion yuan year-on-year), medium- and long-term loans by 392.3 billion yuan (40.3 billion yuan year-on-year), public short-term loans by 58.5 billion yuan (down 205.7 billion yuan), and medium- and long-term loans increased by 403.1 billion yuan ( The year-on-year decrease was 36.5 billion); bill financing was 144.7 billion (an increase of 291.6 million over the same period of last year). From a follow-up perspective, residents' loans may be further tightened, and residents' leverage growth may continue to slow. If the enthusiasm of residents to buy a house does not significantly reduce, it will continue to affect other consumption.

2. Deposits are still weak, and the year-on-year growth rate of M2 is affected by the base number.

In May, the growth rate of M1 continued to decline to 6% year-on-year, falling to the low level in the first half of 2015; M2 was affected by the low base last year, and the growth rate remained 8.3% year-on-year (after the introduction of the 343 policy in April last year, the equity in May and Other investments have shrunk dramatically, and M2 growth also fell below 10% in May last year.) Regarding deposits, new RMB deposits reached RMB1.3 trillion in May, and the deposit balance grew 8.9% year-on-year, still relatively weak. Of which, residents’ deposits increased by 216.6 billion yuan, which represented an increase of 91.7 billion yuan over the same period of last year; however, corporate deposits only increased by 13.9 billion yuan, which was related to the current tight financing demand of some companies and limited liquidity; fiscal deposits increased by 386.2 billion yuan in May, not exceeding Seasonality, this year's fiscal deposits as a whole is more smooth than last year; non-banking financial institutions deposits increased by 214.4 billion yuan, higher than the same period last year 98.3 billion yuan. Under the general lack of growth in deposits, banks’ demand for active liabilities increased, which also led to a rise in the volume of deposits in May.

3. Social Wealth has shrunk sharply, non-standard and credit debts have been negatively increased, and the regulations on new regulations on assets management have also brought about certain impacts.

The increase in the scale of social financing in May was 760.8 billion yuan, which was 302.3 billion yuan less than the same period of last year. It was even more dear than in April. Among them, only stock financing was growing: Foreign currency loans decreased by 22.8 billion yuan, entrusted loans decreased by 157 billion yuan, trust loans decreased by 90.4 billion yuan, undiscounted acceptance bills decreased by 174.1 billion yuan, corporate bonds decreased by 43.4 billion yuan, and stock financing increased by 43.8 billion yuan. . From the perspective of capital providers, the details of the new regulations on assets and capital management have not been settled yet. Banks and trusts are in a wait-and-see state, and their businesses are cautious. No matter whether they are buying debts or non-standards, they are at a standstill. Therefore, tightening is obvious, and follow-up attention is paid to the progress of the detailed rules. Once in place, each channel may be partially restored. From the perspective of capital demanders, under the tightening of financing of PPP clearing houses and urban investment platforms this year, infrastructure investment has slowed down, and the demand for funds has also been weakened, which is also one of the reasons for weakening social financing. Specifically:

(1) Since the credit default risk has increased since April, the issuance of credit bonds has been difficult, and the net increase in corporate bond issuance has turned negative for the first time. In addition, due to the supplemental annual reports, the issuance of credit bonds is weaker in May every year.

(2) The channel to go has not yet been completed, the decline in trust loans has increased, and the decline in commissioned loans has been relatively stable, and will decrease further in the future. After the introduction of the new regulations on asset management, off-balance-sheet financial management has shrunk significantly due to non-standard conditions, but the details have not yet been settled. The trust companies still generally report that they are afraid to conduct business. The trust balance data released in April showed that the trend of channel service compression is very high. obvious. Entrusted loans and trust loans will be under pressure.

(3) The bill financing in the table was stronger this month, but the off-balance sheet bill financing (undiscounted bill acceptance) turned negative, which is a normal effect of the recent regulation of the bill financing policy.

Trust Defaults Rising

East Money: 中信信托再遇违约 信托业兑付压力大增

At the end of May, a temporary information disclosure report of CITIC Trust triggered a trust default warning.

This interim report shows that CITIC Trust launched the “Beijing CITIC Golden Loan Collective Funds Trust Plan” (hereinafter referred to as “Changtian 2”) established on May 4, 2017 to the Beijing Gold Exchange Center. Co., Ltd. (hereinafter referred to as "Beijing Gold") issued 545 million yuan in trust loans. It was originally scheduled to repay principal and interest on May 4, 2018, but after the expiration, neither the principal nor the interest of 10 million yuan was paid, which constituted a substantial breach of contract. The Times Weekly reporter sent this question to CITIC Trust for an interview outline. As of this writing, no reply was received.

This is the second breach of trust project that CITIC Trust broke out in May this year. Two weeks ago, CITIC Trust’s “Second Interim Information Disclosure Report on the CITIC Kabitan 2nd Loan Collective Fund Trust Plan (hereinafter referred to as “Kaifong 2”) was exposed by the media. The report prompts the beneficiaries that the TianFang Group may The default risk of failing to repay loan principal and interest as scheduled. Shortly after receiving media attention, the Kaaba Group wrote to CITIC Trust that it will repay on schedule.

In addition to the two cases of trust default mentioned above, at least 12 trust products have been delayed or unable to be redeemed this year.

The trust industry has 18 trillion yuan in assets.

At the moment of the transformation of the trust industry, improving the proportion of active management capabilities and active management scale is one of the mainstream ways of transition. However, according to the data released by the China Trust Industry Association, the size of the passively managed trust assets in the trust industry rose in both increments and growth rates in 2017.

According to data from the Trust Industry Association, the size of the passively managed trust assets of the 68 trust companies reached 18.44 trillion yuan at the end of 2017, an increase of 5.05 trillion yuan from the end of the previous year, and the ratio of passive management to total trust assets was 70.18%, an increase of 4 percentage points from the end of last year.

Maturing trusts will jump 32 percent this year:

According to statistics, at least 12 trust products have been delayed or unable to be redeemed this year. On the other hand, the increase in the scale of maturity also makes the industry pay more. Statistics show that the total maturity of trust products in the first five months of this year was 209.6 billion yuan, an increase of 40.48% compared with the same period of last year. There will be about 4.1 trillion yuan worth of trust products due to expire within the year, an increase of 31.59% year-on-year.

..."2018 is a credit year." Guotai JunanThe research report of the fixed income research team of the securities company stated that this year, the corporate financing environment was significantly tightened, and non-standard, credit, and bond issuance rates have risen sharply. Affected by regulatory impacts and returns, corporate refinancing sources have turned to banks.The dependence on credit and trust non-standard continues to decline, and the dependence on the credit bond open market continues to rise, leading to a significant increase in credit risk exposure in the market.

2014 Returns: New Default Wave Underway, Soaring Yields, Ratings Agencies Criticized, SOE Investors Flee Credit Market

Several in-depth articles on the growing (albeit still small) default wave in China.

Key points

The defaults to this point are far behind the 2016 pace, but as I discuss below, the more appropriate comparison may be 2014.
Ratings agencies are already facing criticism.
Private investors are bottom fishing, but SOE investors are being "politically correct" aka avoiding risk.
Regulators are blamed for the defaults.
Credit guarantees are causing trouble again.
No consistent pattern as in 2016, when it default was concentrated in industries such as steel and coal.
Even though defaults are limited, spreads are widening and hundreds of issues trade above 9%.
Govt intervention is rightly dismissed at this point, but what's notable is that its mentioned at all given the overall opinion that this isn't as bad as 2016.

Xinhua: 债券违约频发 六大评级机构受牵连遭质疑

Recently, the credit bond market frequently broke the case of default. As of May 31, there have been 20 bond defaults (including guarantee defaults) since the beginning of this year, and the amount of breaches has been around 12.7 billion yuan. Among them, seven new violations were involved, involving 10 defaulting bonds, and the scale of default was about 5.7 billion yuan.

Substantial bond defaults have caused the issuance of certain issuers such as listed company bonds to be difficult. This has led credit rating companies and even the entire industry to fall into dissent, such as joint rating, joint credit information, Peng Yuan credit, China Chengxin International, Dongfang Jincheng, and Shanghai. Institutions such as the New Century Ratings have been questioned in connection with the default of the issuer’s bonds. Many of them have encountered multiple default bonds.

...At present, rating agencies generally believe that the main cause of the default wave of this round of bonds is the difficulty of refinancing under the background of credit contraction, and there is no direct relationship with rating agencies.

Why don't ratings agencies provide "stress test" ratings?


China Daily: Bond default risks rising for corporates

On Thursday, the Ministry of Finance and the National Development and Reform Commission, the nation's top economic regulator, jointly warned Chinese corporates to guard against debt risks, especially those who have borrowed medium to longterm foreign debt.

"Corporates are forbidden to take guarantees from local governments," said a notice published on the NDRC website, an indication that companies should repay borrowed funds and take risks on their own.

The government's warning is aiming in particular to separate corporate debt from local government debt in order to reduce the local governments' contingent liabilities, according to Daisy Lu, an analyst with Moody's Investor's Service, another global credit ratings agency.

The credit guarantee returns again!

According to incomplete statistics, a total of 8143 bonds to be repaid will be issued in 2018, and the scale of repayment will be approximately 5.75 trillion yuan. From the perspective of repayment type, the maturity scale is about 5.12 trillion yuan, accounting for 88.89%; the principal cash redemption scale is 511.134 billion yuan, accounting for 8.88%; as of May 25, the resale scale is 128.306 billion yuan, accounting for 2.23%. . From the perspective of bond types, the size of short-term financing bills to be repaid is approximately 2.38 trillion yuan, accounting for 41.36%; medium-term bills are approximately 861.83 billion yuan, accounting for 14.98%; asset-backed securities are approximately 702.636 billion yuan, accounting for 12.21%; corporate bonds The scale of corporate bonds to be repaid was 548.979 billion yuan and 537.343 billion yuan respectively, accounting for 9.54% and 9.34% respectively.

Even though defaults are running behind last year's pace, there's already talk of government intervention.

JRJ: 债券、信托违约接连出现 国家层面是否会出手干预

In 2018, it was hard to overemphasize that the financial market used "unconvinced" to describe it. In the past two months, it was believed that everyone was "spoiled" by bond and trust defaults. The majority of investors were also afraid of "thundering." Institutions generally believe that continuous default events are "labor pains" brought by such measures as strong supervision, de-leverage, and risk removal. At present, the fundamentals of the company are not universally deteriorating, and the overall risk is still controllable.

Bonds and trusts continue to default

Not only the bond market, but also the trust market, which has always been regarded as a “just-in-fighted” market, broke out with several incidents of default. According to Wind's incomplete statistics, at least 12 trust products have been delayed or unable to be redeemed since this year . Download A PP to read more in-depth coverage of this article

Not only the bond market, but also the trust market, which has always been regarded as a “just-in-fighted” market, broke out with several incidents of default. According to Wind's incomplete statistics, at least 12 trust products have been delayed or unable to be redeemed since this year.

At the same time, the scale of maturity of bonds and trust products during the year is still at a high level.

On the bond front, Wind's previous statistics showed that the maturity of medium- and low-grade credit bonds in 2018 was 1.917874 trillion yuan, accounting for 33.81% of the total maturity, and in 2017, the ratio was 28.71%.

　Why is there a continuous breach of contract?

Regarding the “default tide” situation in the bond market, CICC believes that this “default tide” is not an accident. Unlike the risk of debt repayment during the deflation period that was exposed in 2016, the current round of debt default accelerated by the end of last year. The tightening of the financing environment, especially after the introduction of the new asset management regulations, the rapid return of non-standard assets of banks brought pressure to the capital chain of local governments and private enterprises.

As for the frequent breaches of trust products, Guohai Securities believes that the supervision of the new asset management regulations and Circular 55 on the trust industry will inevitably lead to the shrinking of the trust scale. The dismantling of shadow banking means that The financing of enterprises that originally depended on the financing of the trust channel was limited, which led to the tight liquidity of the company and pressure on the company's credit risk and credit spreads. This is also the reason for the rapid increase in breach of the trust industry this year.

According to Lianxun Securities, the current leading companies' profitability and financing ability are stronger. Under the tight financing conditions, the ability to resist risks will be relatively stronger. Some small and medium-sized enterprises with weaker profitability may face greater pressure.

Will the government intervene?

So, for the exposure of this round of credit risk, whether it will intervene at the national level?

The answer is that in the short term, this sign cannot be seen. There are three main reasons:

First, with the release of stocks and exchanges completed, deleveraging has achieved remarkable results in the first half, and the second half has entered an anxious period, the policy is now more determined than ever before.

Second, State Council Deputy Prime Minister Liu He’s intentions on the May 15 National CPPCC Thematic Consultation were clear:

To do business is to have the capital - not only rely on a lot of debt empty gloves white wolf;

Borrowing money is a must--you must take responsibility for repayment after you borrow money;

Investment is to take risks - the investment must bear the corresponding credit risk, can not expect others to come to the fore.

Third, the large-scale trade frictions between China and the United States have come to an end. China has secured valuable time. In the coming period, it will expedite the handling of prominent domestic issues without causing systemic risks. Broad currency + structural tight credit, downgrade + increase The policy portfolio of interest will be the main theme of the future, and it will become even more common to break the corporate ambitions of zombies.

Therefore, it is expected that the relatively concentrated exposure of private companies’ credit risk will continue in the future, and even gradually spread to poorly-positioned state-owned enterprises. It is not easy to achieve leverage without difficulty.

As I've said before, China cannot afford to fight a trade war. China's economy is at its most vulnerable because of its prior credit growth. Most nations are similarly at risk, but it won't take as much to send China into a negative feedback loop. Any external macro shock could do it, including something as simple as a 10 percent rally in the U.S. dollar from current levels, which should carry USDCNY past 7.0 and reignite outflow pressure and depreciation expectations.

East Money: 债市困境亟待破局 部分机构“抄底”

　At the turn of the spring and summer of 2018, successive incidents of concentration breaches caused the bond market to remain in a state of tension. The immediate plight of private enterprises is urgently needed to unlock.

Data show that from the transaction status of the bond secondary market on May 24th, the yield of bonds with more than 10% (including 10%) is 334; the yield with yields of more than 9.6% (including 9.6%) has already reached 400.

Professionals believe that from the market point of view, this price has gone beyond the normal reasonable price range, which means that the issuer may lose the possibility of issuing new debt, and it also means that it will lose the ability to refinance. This situation may further exacerbate the market’s fear of credit debt.

At the same time, the “politically correct” orientation of the state-owned investment institutions is obvious, and some organizations have already started “bottom fishing.”

In an interview with the China Business News, regulators said that the supervisory level is committed to multi-layered efforts to ease the current tight market conditions by calling for guidance, clarification, coordination and negotiation, and intends to establish targets for defaulting companies and venture companies. Specialized trading section to cultivate multi-level investment groups. This time, the concentration of breach of contract is a problem of the entire financial system, and in particular, the situation of the private company's own credit is weak. It is not that the bond market supervision can be reversed, and it requires joint efforts of all sectors.

Including the PBoC, which expanded MLF collateral on Friday.

According to the data, on May 24, 2018, for example, bond transactions in the secondary market showed that a considerable number of bond yields were operating at high levels, and most of them were private enterprises, including state-owned enterprises.

There are 334 bonds with yields exceeding 10% (including 10%) and 400 bonds with yields exceeding 9.6% (including 9.6%). Among them, most high-yield bonds are concentrated in the range of 10% to 20%, with a total of 244. In addition, there are 20 bonds with a yield of more than 40% and 70 bonds with a yield of 20% to 40% (excluding 40%).

In the secondary market on May 24, the yield of the 16 god fog debt has reached 136%, and the current valuation is 53 yuan; the Kaidi debt yield is between 15% and 18%. The risk of breach of contractual shield security debt yields between 26% and 27%.

Anyone interested in taking a flier on some god fog (神雾) bonds?

“From a market perspective, although a considerable number of bond yields are operating at high levels, it also proves that the secondary market for bonds is effective and that the issuer has been separated by a price mechanism.” Guan Li (a pseudonym) stated that the yield of hundreds of bonds exceeded 10%, which has far exceeded the normal reasonable price. Generally speaking, the yield of more than 9% indicates that serious problems have appeared.

"After the bond yield exceeds the normal level, it means that the follow-up normal financing capacity is lost, and the debt is like a flood. It is rigid. This kind of situation should cause a high degree of vigilance, just like the explosives piled up next to the arsenal. It has been a point, and it will be followed by a catastrophic chain reaction.” According to Zhang Li, it is indeed necessary to use external forces and turn in a favorable direction to prevent systemic risks.

On the state-owned investors fleeing the rising risk in the debt market:

Investors Pursue "Political Correctness"

In the spring and summer at the turn of the private company's continuous breach of contract facts or default risk, as an intermediary, the brokerage firm's investigation and exploration of the market is undoubtedly more urgent and necessary, and visiting investors is the most important part.

“The recent sales department's intensive visits to investors have fed back the typical attitude of some investors.” Another senior manager Wang Fang (a pseudonym) who worked at a top ranking securities company introduced the current investors are mainly divided into two states.

The first kind is conservative. Indifferent to bond issuers and “one size fits all” investors, the market appears risky rumors, it does not distinguish whether this risk is still there, whether it is big or small, simply throw it all away, and Never touch again.

The second type of investor has a slightly more complex mentality. Most of these investors are state-owned organizations. In making decisions on foreign investment, the priority is to seek "political correctness."

"The same as the "long-term cherished loan" phenomenon of loans to SMEs, the visit found that a large part of state-owned enterprise investors have the same mentality." Wang Fang said.

According to reports, credit debt defaults have occurred continuously for a period of time, and most of them are concentrated in private enterprises. No one knows which one will be the next.

Many state-owned investment institutions have complex mentalities but have clear positions.

"They think very directly. At this node, if I reinvest private corporate debt, if something goes wrong at the end, it may be my responsibility." Wang Fang said that because the outside world has requirements for policy makers, the risk control department Leaders at higher levels will question investment decisions. Why are they still investing in corporate bonds in such a risky environment? Why don't you vote for 3A state-owned corporate debt? Even if interest rate prices are low and revenues are low, at least there is no risk of breach of contract, and security is guaranteed. In the event of a default of private corporate bonds, the losses will be significant. The future of individuals may also leave hidden dangers due to decision errors.

Private investors are stepping into the gap and buying low:

“When everyone fears, you have to be brave.” Unlike state-owned organizations that are seeking for safety and stability, there are also many investors who have discovered business opportunities and opportunities for “wrongly killing.”

According to Wang Fang’s introduction, the two agencies that he knows have started to buy a lot of scattered debts in accordance with the combination of high-yield bonds. "They are hunters."

In fact, the "bottom-hunting" institutions are not blind, but because of solid research, rational analysis, and calm judgments.

“For example, there are some debts with high interest rates . The above institutions have made basic judgments through actual investigations or through the bank channels. Perhaps 99% of people said that the company’s risk is high, but the above-mentioned organizations believe that after the investigation , they will not Breach of contract, and then into the bond market." Wang Fang said that in the frequent violations of private enterprises at the same time, it seems to be a risky company to make a reverse decision, not only need courage, but also need wisdom.

On tight credit conditions:

The regulator believes that in this very market-oriented market, the increase in natural events is inevitable during the process of rigid payment and payment.

“Integral tension in liquidity and increased defaults in deleveraging are an inevitable phenomenon in stages. We will be very careful not to trigger systemic risks, but at present, this risk is still a very low level, including credit ratios. The bad rate is much lower," the regulator said.

Zhang Xu said that the above "liquidity overall tension" refers to the broad liquidity of the real economy. Since this year, the narrow liquidity of the banking system has been neutral and loose. The occurrence of frequent defaults is not caused by the lack of liquidity in the narrow sense, but because the credit derivatives of commercial banks are suppressed by the following three factors: capital, deposits, and credit. Willingness. Even if the central bank injects excessive liquidity into the banking system, the above three constraints are difficult to be substantially alleviated. At the same time, it may provide a hotbed for illiquid funds and excessive leverage. In fact, a structural credit policy will have a positive effect on reducing defaults, and will allow the weaker aspects of the national economy to receive more credit support. For example, the April 25 bid is a kind of policy: financial institutions will mainly use the new funds for the loans of small and micro enterprises, and appropriately reduce the financing costs of small and micro enterprises, and improve the financial services to small and micro enterprises.

And what did the PBoC do late on Friday June 1? Expand the scope of the MLF:

The scope of newly incorporated medium-term borrowing convenience collateral includes: AA-class small and micro enterprises, green and “agricultural, rural, and peasant” financial bonds, and AA+ and AA corporate credit bonds (priority for bonds involving small and micro enterprises and green economy) ), high-quality small and micro business loans and green loans.

There's a clear difference with 2016. The default wave back then was driven by indebtedness and the economic slowdown. This time regulators are causing the early default pressure:

Default risk is different from default violation in 2016

At the moment of frequent breach of contract, the industry will inevitably compare this concentration of default with the default of 2016.

In fact, there is a clear difference between 2018 and 2016.

Analysts said that in 2016, industries with excess capacity such as coal, steel, machinery, and non-ferrous metals became high-risk areas for breach of contract, and there was a default event represented by East Steel. This is mainly due to the objective background of the economic downturn and the weak awareness of individual issuers' subjective debt repayment. This year's breach of contract is more due to the broad-based credit contraction triggered by "strong financial supervision" and "strong government debt supervision."

The China Everbright Recruitment Team believes that the cases of breach of contract from the beginning of 2018 to the present are relatively limited. There are only 6 new defaulters, which is far below the level of 13 in the same period of 2016. In terms of scale, a total of 16.6 billion yuan of bonds defaulted since the beginning of the year, which is equivalent to 80% of the 20.5 billion yuan in the same period of 2016.

The factors of breach of contract are not the same, the nature of the breaching party is different, and the market's expectation of default is also not the same.

The difference is where we are in the credit and economic cycles. The 2016 default wave was the tail end of the prior credit disinflation. China was pumping liquidity into the economy in 2016, commodity prices were soaring by spring, quickly followed by home prices (some cities were already rebounding in late 2015). This year is more akin to 2014, when I posting articles such as: Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave. That was the last time the government tried restraining credit growth. The economic weakness started with the small and weakest enterprises, as it is now, and then broadened as the global economy cooled and commodities such as oil and copper plummeted into the 2016 lows.

The Noose Tightens: CBRC Investigates Trust Loans to Real Estate

Back in 2014: China Tightens Oversight of Trusts as Default Risk Rises

China’s banking regulator ordered owners of the nation’s 68 trust companies to be prepared to provide funding or sell their stakes as the risk of defaults rises in the $1.9 trillion industry for high-yield investment.

The China Banking Regulatory Commission told trust companies to either restrict their businesses and reduce net assets or have shareholders replenish capital when the firms suffer losses, according to an April 8 notice that was seen by Bloomberg News. The regulator will also impose a “strict” approval process on trust firms’ entry into new businesses and products starting this year, according to the document.

After a brief crackdown, the trust business was up and running again.

Bloomberg, April 2017: China Said to Crack Down on Property Financing Through Trusts

The China Banking Regulatory Commission’s guidance covered real estate and other industries facing overcapacity, according to people familiar with the matter. The CBRC will take action against disguised property financing by the 20 trillion yuan ($2.9 trillion) trust industry, including lending through partnerships, asset management plans or related businesses such as suppliers, the people said.

This crackdown is now underway after it revived in the first quarter.

iFeng: 房地产又一通道被收紧 银监会检查信托违规拿地

China Securities Journal reporter was informed that the recent CBRC to the banking regulatory authorities issued "2017 trust company on-site inspection points."

01

Whether through the combination of equity and debt, partnership business investment, the proceeds of receivables and other modes of disguise to the real estate development enterprise financing to circumvent regulatory requirements, or to assist other institutions to carry out real estate trust business.

02

Whether there is a real equity or creditor's rights in the project of "stock + debt", whether there is a situation where the real estate enterprise acts as a beneficiary of the shareholders' borrowing, whether or not it is disqualified in the name of the shareholder's loan.

...Industry sources said that as other financing channels are limited, the trust company to become an important channel for real estate developers to finance. But this document issued after the trust company to carry out the current financing business is facing tightening. This means that real estate financing and an important channel is being tightened.

Caijing: 房企融资四面楚歌 信托渠道突然收紧房企命脉告急

This means that after overseas bonds were halted, developers through the trust company financing this important channel also suffered tightening.

Wall Street on Monday mentioned that trust financing is the main financing of housing loans in addition to bank loans, with the main financing channels have been limited real estate, real estate trust business quietly warming.

"Economic Reference" quoted data pointed out that this year, 68 trust companies issued a total of 326 real estate trust products, the cumulative financing for housing enterprises 100.55 billion yuan; May real estate trust issue is still "increasing." Up to now, May housing prices through the issuance of collective trust fundraising project has reached 11.37 billion yuan. May 13 to May 19 of the week, a total of 24 trust companies issued 39 sets of trust products, the number of shares increased by 11, an increase of 39.29%. Among them, 10 for the real estate projects.

...Wall Street.cn mentioned at the beginning of the month, since the beginning of the year, Vanke and R & F and other housing prices have canceled the debt, involving the amount of at least 50 billion yuan. The two companies in the cancellation of the announcement said that in view of the recent changes in the market, decided to cancel the issuance of medium-term notes, Vanke more twice to cancel the issue of medium-term notes.

In fact, the plight of developers emerged in the fourth quarter of last year. Hai Tong Securities analyst Jiang Chao, Zhou Xia and Zhu Yixing in the report pointed out that the quarterly real estate bond issuance and net financing was only 30% of the third quarter, mainly due to the tightening of corporate bonds. From November last year to the end of February this year, real estate corporate bonds issued only 29.

Tightening of credit revived the trust sector loans to real estate, hence the crackdown.

DW: How dangerous are China's shadow banks?

"There are indications that regulatory measures to curb system-wide leverage show unintended consequences; specifically, in reviving 'core' shadow banking activities that had previously been constrained by regulation," said George Xu, Associate Analyst at Moody's Investors Service.

Moody's said borrowers in sectors such as property, local government financing vehicles and industries struggling with overcapacity faced reduced access to traditional bank loans and were being driven to trust loans.

We've seen this all play out before, in 2013 and 2014. Right after the Taper Tantrum in the U.S. came China' cash crunch. From June of 2013 through all of 2014, there was an attempted deleveraging. The result was falling home prices, panic, and the final massive monetary emission in early 2016. Now we're back to seeing a crackdown, complete with signs of periodic cash crunches such as in March. What's different from 2013 is the scale of the problem and the severity of the crackdown. The commodity, real estate and currency market declines from 2014-2016 will be dwarfed by what follows.