Chinese Banks Get Tricky as Credit Crunches; Workers Unpaid; Shanshui Default, HFIG Daisy Chain Still Exploding

Wondering why China just hit the economy with the credit firehose and has been since mid-2015 to little effect?

Bloomberg: China's Banks May Be Getting Creative About Hiding Their Losses

Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank AG estimates may result in losses of as much as 1 trillion yuan ($153 billion) over five years.

Banks are increasingly using trusts or asset management plans to lend and recording them as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits. The German bank’s forecast is based on total outstanding receivables of around 11.5 trillion yuan.

I covered some of these tricks in prior years.

From 2014: Bad Loans: 100 Billion in 2013, 60 Billion in First Two Months of 2014; Tricks For Hiding NPLs

New bad loans," the adjustment occurs only in the identified stages, "bad loans" and "bad rate" is affected by the two-stage operation, in which the defect rate is also affected by the credit scale denominator factor.

......In fact differences between the banks lending criteria and parameters for classification do exist. Galaxy Securities banking analyst Huangbin Hui said that these differences can be seen in bank financial statements based on the calculation of total loans more than 90 days past due / non-performing loan balance, or (concern loans + NPL) / total overdue loans contrast. In general, the standard line of state-owned banks more stringent compared to some of the shares.

In addition to the different parameters, technical operations, loan classification error will appear subjective or objective. "For example, some concern loans are actually subprime loans, but sometimes may delay adjustment classification, did not make real." Above the state-owned bank said that the regulatory authorities will carry out checks on loan classification periodic deviation in touch clear adverse classification and statistical accuracy, the true extent.

He therefore believes that the bad loan determination stage, compared to techniques, the use of means to control business loan classification downward migration rate, adjustment is the largest.

Also from 2014: Who Will Buy Bank of China's Toxic Assets? Bank of China

Bank of China Ltd., one of the country's big four state-owned banks, has started a new strategy of unloading soured loans to its investment-banking unit, which then would try to restructure the debt with the hope of recovering more than it paid for the loans, according to bank officials.

With the investment-banking unit expected to pay more than an outside investor, the bank would be able to record lower loan losses. Meanwhile, the problem loan would no longer stay on the bank's balance sheet after the sale under Chinese accounting rules. By comparison, such intracompany transactions usually aren't treated as sales under Western accounting standards.

Credit guarantees are the land mines in China's financial system. Chinese banks rate guaranteed loans higher than non-guaranteed loans, even if the guarantee is worthless. Credit guarantee firms often have interlocking guarantees and industries are often riddled with cross guarantees such that only one key firm needs to go down to trigger wave after wave of defaults.

Remember HFIG? The biggest credit guarantee firm in Hebei province, an SOE, went bust and the fallout is still spreading. The best quote out of this unfolding fiasco is: Good Businesses Don't Need A Guarantee. Instead of viewing a guarantee as something to be desired, a switch was flipped and now a guarantee is a sign of a potentially toxic investment.

In Hebei, ￥50 billion in real estate investment products are at risk due to the collapse of HFIG, but the default is being blamed on developer defaults in third- and fourth-tier cities and corruption. Sina: 河北融投折戟地产担保 500亿债权资金漏洞无力修补

HFIG liquidated trusts, private equity funds, the majority of real estate projects, while the third- and fourth-tier cities downturn in the real estate industry as a whole, as well as policy tightening, housing prices, executives suspected of corruption are important causes of the above default.

Looks like a regular credit bubble to me.

　That time "Luoyangzhigui" Hebei Investment Guarantee Financial Group Limited (hereinafter referred to as "Hebei Rong vote") letter of guarantee, but now it has become a hot potato of major financial institutions.

Beginning of this year, nearly a year-long delay 500 billion debt funds vulnerability has yet forthcoming, facing many financial institutions struggling to recover, Hebei financial investment does not come up with practical solutions to compensate investors losses.

People are looking for the next NPL, but there's already a lot of "hot potatoes" that are really quantum NPLs: the debt isn't bad as long as you don't observe it.

Recent media reports that as of the end of September 2015, there are still 14 brokerages, fund subsidiaries 54 management plans involve HFIG, a total size of 6.224 billion yuan.

Among them, 48 investment products, the size of the total 4.767 billion yuan, involving up to 3,000 investors; focus on the product expires in the second half of 2015 and the first half of 2016.

This is "the tip of the iceberg."

According to Hebei Rong CIC had said: "From a risk point of view the investigation, the current third- and fourth-tier cities real estate industry is now much larger risk for financial institutions, banks are more cautious towards real estate, mining, coal industry banks, because real estate projects cooperation is too long before, basically do not do any new real estate projects."

He said the debt crisis in the real estate projects, HFIG projects are the tip of the iceberg. While they stopped new real estate projects, projects from a few years ago have come due. According to public information display, the first half of 2015, in the real estate industry there were billions in trust and investment plans maturing.

More details at the link.

Firms that relied on HFIG guarantees are going bust. Last year one executive of a trust was stabbed by an irate investor. Now another firm, Yijiu, can't repay its investors.

Chen Lin said that as the Hebei Investment Guarantee Financial Group Limited (hereinafter simply referred to "Hebei Rong vote") for breach of contract, resulting in a financial investment product involving Hebei maturity can not honor the fact that Yiju financial platform. Hebei financial investment involved a total of 12 periods, the total amount of 59.6 million yuan, investors 447 people, scattered in Beijing, Chongqing, Shanghai and other parts of the country.

"Because of this risk, Hebei financial investment due to the input of the risks and are not Yijiu financial platform their own risk." Economic Observer Online reporter Chen Lin said, "We are currently actively assist investors in processing claims disputes, to help them recover claims. "

Business Information display, Yijiu financial entities in Chongqing and Shanghai.

Chongqing Yijiu Financial Services Limited was established in June 9, 2013

A lot of these trust and investment firms sprung up overnight as shadow banking surged in 2013. In one example from Sichuan (Textbook Credit Implosion Underway in Sichuan Province):

Rent no doubt was high due to growth in investment management/ advisory firms. At end of December 2013, there were nearly 5,000 of these financial firms, an increase of roughly 4000 from June of the same year!

Credit guarantees aren't the only risk. More bonds are expected to default this year, and Shanshui just defaulted on another debt. ChinaNews: 信用风险频现 违约未完危中存机

When the company debentures coming due encounter economic adjustment, earnings decline and capacity to melt, in 2016 the credit market has not meant to calm. Since the New Year, it has exposed a series of bonds more than an event of default, to remind investors of credit risk "alarm bells ringing."

Market participants believe that the economy continues to dip, poor efficiency of industrial enterprises, credit risk fundamentals continues to expand, the frequency and scale of "supply-side" reform and promote capacity-clearing process, in 2016 the credit risk event may also upgrade, anti-risk can not be taken lightly, mention rating, risk control has gradually become the mainstream view, but low-rated debt is not all minefields, on the basis of meticulous research, careful selection, based on the low-rated bonds in the "gold Rush" will also be thickening an important direction revenue.

Shanshui defaulted again.

Enter 2016, various events of default still come and go, only February date, three cases had occurred. This is among the main characters, both "old acquaintance", but also "new faces." February 14, Shandong Shanshui announced that the second phase of ultra-short-term financing bonds company 2015 annual "15 Landscape SCP002" overdue payment of principal and interest in full. This is the landscape's Shandong after "15 landscape SCP001", "13 landscape MTN1", breach of the third branch raised bonds.

Recently the same old debt outstanding, have added Xinchou there Tianwei Group. Tianwei Group, first issued in 2011, two medium-term notes will be held this year on February 24, April 21 expiration facing debt service. April 2015, failed because of Tianwei Group payment schedule "11 Tianwei MTN2" of current interest, creating China's first state-owned debt default cases. The company released September 5 announcement prompted the risk that, due to continued losses, the funds dried up, "11 Tianwei MTN1" uncertainty principal and interest payment. According to another report, in addition to two votes expiring Tianwei Group as well as 2 billion yuan of non-public offering of PPN will expire.

Companies on the credit watchlist:

Company name included in the credit rating watch list reasons
Nanjing Iron and Steel Co. Nanganggufen business pressures, increased financial risk, the presence of impact revival Group signed proxy voting matters relating to the future operation of the company's uncertainty.

Tangshan Jidong Cement Co., Ltd. industry downturn, a loss greater performance prediction.

SDIC Xinji Energy Co., Ltd. expected loss is large.

Sinovel Technology (Group) Co., Ltd. Annual decrease Profit from principal operations: operation and maintenance expenses increased considerably; estimated loss is large.

External guarantee balance Mianyang City Investment Holding (Group) Co., Ltd. a total of 2.787 billion yuan, which the Yasunobu international joint responsibility to ensure the balance of 108 million yuan a counter-guarantee compensation face greater risk.

Xining Special Steel Xining Special Steel Co., the performance loss of business, the impact of the financial situation that may arise.

Shanxi Taigang Stainless Steel TISCO expects a large loss, assets and liabilities rate debt would have a negative impact indicators.

A listed firm named 匹凸匹 (P2P Financial Information Service) is also in trouble. Remember this news from last year? To Invest In China's Bull Market, Turn Off Your Brain

Lest you think Baofeng is the only example of deranged behavior, there's more, such as Shanghai Duolun (600696) shifting from real estate to P2P lending, having only changed its name and experiencing limit up gains for two straight days.

A real estate subsidiary (i.e. P2P's main business less than a year ago) in Jingmen, Hubei stopped work and hasn't paid its workers. Sina: 匹凸匹子公司面临资金链断裂 常拖欠农民工工资.

Unpaid wages are becoming a more common situation as firms run into financing trouble. IBT: Chinese New Year Not So Happy For China’s Growing Number Of Unpaid Workers

But CLB’s Geoff Crothall says the cases of wage arrears seem to have increased this year, with the number of strikes his organization reports a “snapshot” of the scale of the problem. “They’re just the ones we can spot that are posted on social media," he says. "There are some that we don’t log because we can’t verify them.” And he suggests that many other protests are never posted on social media, while in other cases workers simply accept arrears without protesting. “It’s definitely getting worse,” he says.

...“If you look at some of the companies that are having problems, a lot of them are start-ups, in areas like e-commerce or robotics, all these bubble industries that everyone rushes into without any real planning or forethought," Crothall said, adding that such companies often hire workers on short-term contracts, giving them little protection.

To Invest In China's Bull Market, Turn Off Your Brain

Here's an opinion piece by Wu Xiaobo that starts off discussing the insanity that is Baofeng's stock price and goes on to provide some good anecdotes. When Baofeng was limit up 20 times in a row, he received several phone calls from people asking him to explain what was up with the market. After the 35th limit up day, they suddenly became very quiet.

This is a collective psychological breakdown after the rational defense line has been breached, caused by extreme excitement leading to the choking of thought.

He goes on to say that at best, Baofeng would rank behind 200 other Chinese Internet companies and yet its market cap exceeds that of Youku (YOKU),

Chinese investors "love" of Baofeng can not be explained by any theory or model.

Reason - if it really exists, in the face of the daily limit up has completely passed out. Sparkling first 35 daily limit, the "suspect" itself becomes meaningless, rational analysis gives way involuntarily coerced type impulse, all reactions are fermented into profit-instinct: Who will be the next Baofeng, and will that company be me?!

Lest you think Baofeng is the only example of deranged behavior, there's more, such as Shanghai Duolun (600696) shifting from real estate to P2P lending, having only changed its name and experiencing limit up gains for two straight days. (ZeroHedge covered it in Chinese Stock Bubble Now Plumbing Depths Of Human Stupidity.)

Then there's Suning, a big box retailer struggling to make it. Two years ago the company tried an online push, but found it started cannibalizing store profits: China's two electronics retail giants take different routes to survival

In February 2013, Suning laid out plans to achieve sales growth of both its actual outlets and online store. It has expanded the product lines it carries at its online shop, Suning.com. Thanks to such efforts, its online retail sales soared 43.9% on the year to 21.89 billion yuan in the year through December 2013, which accounts for 20.8% of its total sales of 105.29 billion yuan.

However, it turned out that the same-price strategy had serious side effects. With its online store, the company has been able to offer lower prices as the operation demands less labor and other costs. But Suning's physical shops had to bring their store prices down to the same level with the online store, putting a heavy squeeze on its earnings.

It was still struggling at the end of 2014: Mega retailers struggle to survive, but the company made timely investment in October 2014: Suning, Hony to Invest $420 Million in China Video Site PPTV.

Nanjing, China-based Suning will pay $250 million for a 44 percent stake in PPTV, making it the video company’s largest shareholder, according to a statement handed to reporters at a press conference in Shanghai yesterday.

Result: the "online video" Suning's (002024) market capitalization exceeded that of the world's largest real estate developer by market cap, Vanke, after shares zoomed from a little over 8 yuan to 20 yuan before pulling back recently.

Back to Wu Xiaobo:

At least eight companies announced reorganization failures, the market took "advantage of this opportunity", continuous daily limit up.

"Sina securities" reported an anecdote: A new female investor in the market for less than year, misheard her broker's recommendation for Chinese Universe Publishing & Media (600373) and bought Beijing Chinese All Digital Publishing (300364) instead [中文传媒听成了中文在线], she dumped 300,000 yuan to buy 5000 shares, just two months later she doubled her money.

The stock she bought is up over 1000% since it IPO'd in January 2015. What's funny is that in the past few days, the book company has gone vertical too, up 50% in the past couple of weeks. Why did the stock suddenly surge? Well it turns out this company is China's most undervalued Internet company. How'd a book publisher manage that?

From July 2014: Bull or Bubble? How to make sense of mobile gaming M&A activity

And more randomly, traditional media or film companies in China are also spending big with Chinese Universe Publishing & Media buying Elex Tech for $434 million

Another timely investment.

Back to Wu Xiaobo's article:

"China Securities News" quoted a senior fund manager, he announced that he had abandoned using his brain, "In the capital market, money is the most intelligent, we respect the market, therefore, it's the 'no brainer buy,' force yourself to buy!"

No one would deny that China's capital market is currently in a parabolic path of irrational exuberance, many people are wondering when the turning point will come, but more people were provoked by this parabola into screaming, ignoring the dangers and investing in this market. This is a crazy scene, unprecedented, never before seen in the world unprecedented - a single day's trading volume of 3 trillion yuan is the equivalent to six times the previous world record.

Yicai: 中国正经历一场资本泡沫运动

China Stock Madness

See what happens when a real estate company changes its business model to P2P lending, without having done anything in P2P lending except buying a domain name.

ZeroHedge: Chinese Stock Bubble Now Plumbing Depths Of Human Stupidity