Deconstructing Evergrande’s effect on China

Elliot Clarke at Westpac says that China will be able to withstand the shock of Evergrande’s collapse and that power outages are a bigger threat.

We still think that the property sector contagion is part of a broader issue that China will struggle to overcome, as Michael Pettis succinctly explained:

China’s debt problem

Tweeted by Prof. Michael Pettis:

In the past — e.g. the SOE reforms of the 1990s, the banking crisis of the 2000s, SARS in 2003, the collapse of China’s trade surplus in 2009, COVID, etc. — whenever China faced a problem that threatened the pace of its economic growth, Beijing always responded by accelerating debt creation and pumping up property and infrastructure investment by enough to maintain targeted GDP growth rates. It didn’t adjust, in other words, but rather goosed growth by exacerbating the underlying imbalances.

That is why it had always been “successful” in seeing off a crisis. But when the main problem threatening further growth becomes soaring debt and the sheer amount of non-productive investment in property and infrastructure, it is obvious, or should be, that accelerating debt creation and pumping up property and infrastructure investment can no longer be a sustainable solution. All this can do is worsen the underlying imbalances and raise further the future cost of adjustment.

What would Putin do?

The Communist Party of China has an unwritten contract with the 1.4 billion people living under its rule: they will tolerate living under an autocratic regime provided that the CCP delivers economic prosperity. So far the CCP has delivered in spades. A never-ending economic boom, fueled by exponential debt growth as investment in productive infrastructure grows ever more challenging.

But they are now familiar with the law of diminishing marginal returns: governments can’t just keep spending on infrastructure without falling into a debt trap. All the low-hanging fruit have been picked and new infrastructure projects offer lower and lower returns as spending programs continue.

That was probably the primary motivation for the CCP’s Belt-and-Road Initiative (BRI): to source more productive infrastructure investments in international markets. But the COVID-19 pandemic brought the BRI to a shuddering halt and the CCP is unlikely to maintain its exemplary growth record — no matter how much they fudge the numbers.

Xi Jinping is faced with an impossible task: how to placate 1.4 billion people when inflation sends food prices soaring and ballooning debt precipitates a sharp rise in unemployment and falling wages. The CCP has been preparing for this very eventuality for some time. Investing billions in surveillance and social credit systems, brutal crackdowns on religious organizations and minorities, suppression of democratic forces in Hong Kong, the latest take-down of tech giants — Jack Ma’s Ant Group and Tencent Holdings — which could form a focal point for democratic opposition, and beefing up internal policing. These are not the whims of an autocratic regime but a desperate attempt at self-preservation. China’s internal security budget is even bigger than its military budget (WION).

Xi Jinping

Behind that inscrutable facade, Xi Jinping is a worried man. Even with all the technology and forces of suppression at his disposal, confronting an angry population of 1.4 billion people is a daunting task. In his darkest hours he must have asked himself the question: WHAT WOULD PUTIN DO?

Even if you don’t believe the RT hype of the bare-chested deer hunter, judo expert and chess grandmaster — a combination of Chuck Norris and Garry Kasparov — you have to give Vladimir Putin credit for surviving 20 years as the head of a murderous regime where only the strong and completely ruthless stay alive.

Vladimir Putin

What would Putin do? The answer must have hit Xi Jinping like a 500 watt light bulb: INVADE CRIMEA. Vladimir Putin enjoyed record popularity at home (if you can believe Russian opinion polls) after invading Crimea. Despite the economic hardships that the Russian people had to endure from Western sanctions. The only force more powerful than hunger is a wave of patriotic nationalism.

Now being the canny fellow that he is, Xi figured that Crimea was too far away to be much use. Luckily for him, there is a handy substitute. An island of 23.5 million inhabitants, living under a democratically-elected government, only 180 kilometers away, across the Taiwan Strait.

Conclusion

We expect the CCP to fuel a wave of nationalist fervor to distract the 1.4 billion people living under their harsh rule from the economic hardships they are about to endure. Conflict over Taiwan is an obvious choice.

At present the PLA is conducting daily incursions into Taiwanese airspace, to map ROC air defense systems and wear down defenders with “response fatigue”.

ROC Reports Incursion by 28 PLA Aircraft

The CCP would not want to interfere with the Beijing Winter Olympics but may use it as a distraction — straight out of Putin’s playbook.

Melik Kaylan at Forbes:

I can say one thing about Vladimir Putin without fear of contradiction: he cares about timing. When he’s up to no good, he loves a sleight-of-hand distraction in global headlines. In 2008 [invasion of Georgia], the Beijing summer Olympics served as cover. More recently, the Sochi Winter Olympics ended just three days before Russia marched into Crimea.

Notes

  1. The 2022 Winter Olympics — also known as Beijing 2022 — is scheduled to take place from 4 to 20 February 2022.

Markets that are likely to outperform in 2021

There is no reliable benchmark for assessing performance of different markets (stocks, bonds, precious metals, commodities, etc.) since central banks have flooded financial markets with more than $8 trillion in freshly printed currency since the start of 2020. The chart below from Ed Yardeni shows total assets of the five major central banks (Fed, ECB, BOC, BOE and BOJ) expanded to $27.9T at the end of November 2020, from below $20T at the start of the year.

Central Banks: Total Assets

With no convenient benchmark, the best way to measure performance is using relative strength between two prices/indices.

Measured in Gold (rather than Dollars) the S&P 500 iShares ETF (IVV) has underperformed since mid-2019. Respect of the red descending trendline would confirm further weakness ahead (or outperformance for Gold).

S&P 500 iShares ETF/Gold

But if we take a broad basket of commodities, stocks are still outperforming. Reversal of the current up-trend would signal that he global economy is recovering, with rising demand for commodities as manufacturing output increases. Breach of the latest, sharply rising trendline would warn of a correction to the long-term rising trendline and, most likely, even further.

S&P 500 iShares ETF/DJ-UBS Commodity Index

Commodities

There are pockets of rising prices in commodities but the broader indices remain weak.

Copper shows signs of a recovery. Breakout above -0.5 would signal outperformance relative to Gold.

Copper/Gold

Brent crude shows a similar rally. Breakout above the declining red trendline would suggest outperformance ahead.

Brent Crude/Gold

But the broad basket of commodities measured by the DJ-UBS Commodity Index is still in a down-trend.

DJ-UBS Commodity Index/Gold

Precious Metals

Silver broke out of its downward trend channel relative to Gold. Completion of the recent pullback (at zero) confirms the breakout and signals future outperformance.

Silver/Gold

Stock Markets

Comparing major stock indices, the S&P 500 has outperformed the DJ Stoxx Euro 600 since 2010. Lately the up-trend has accelerated and breach of the latest rising trendline would warn of reversion to at least the long-term trendline. More likely even further.

S&P 500 iShares ETF/Euro Stoxx 600

The S&P 500 shows a similar accelerating up-trend relative to the ASX 200. Breach of the latest trendline would similarly signal reversion to the LT trendline and most likely further.

S&P 500 iShares ETF/ASX 200

Reversion is already under way with India’s Nifty 50 (NSX), now outperforming the S&P 500.

S&P 500 iShares ETF/Nifty 50

S&P 500 performance relative to the Shanghai Composite plateaued at around +0.4. Breakout would signal further gains but respect of resistance is as likely.

S&P 500 iShares ETF/Shanghai Composite

Growth/Value

Looking within the Russell 1000 large caps index, Growth stocks (IWF) have clearly outperformed Value (IWD) since 2006. Breach of the latest, incredibly steep trendline, however, warns of reversion to the mean. We are likely to see Value outperform Growth in 2021.

Russell 1000 Value/Growth

Bonds

The S&P 500 has made strong gains against Treasury bonds since March (iShares 20+ Year Treasury Bond ETF [TLT]) but is expected to run into resistance between 1.3 and 1.4. Rising inflation fears, however, may lower bond prices, spurring further outperformance by stocks.

S&P 500 iShares ETF/Long_term Bond ETF (TLT)

Currencies

The US Dollar is weakening against a basket of major currencies. Euro breakout above resistance at $1.25 would signal a long-term up-trend.

Euro/Dollar

China’s Yuan has already broken resistance at 14.6 US cents, signaling a long-term up-trend.

Yuan/Dollar

India’s Rupee remains sluggish.

Indian Rupee/Dollar

But the Australian Dollar is surging. The recent correction that respected support at 70 US cents suggests an advance to at least 80 cents.

Australian Dollar/Dollar

Gold, surprisingly, retraced over the last few months despite the weakening US Dollar. But respect of support at $1800/ounce would signal another primary advance.

Spot Gold/Dollar

Conclusion

Silver is expected to outperform Gold.
Gold is expected to outperform stocks.
Value stocks are expected to outperform Growth.
India’s Nifty 50 is expected to outperform other major indices. This is likely to be followed by the Stoxx Euro 600 and ASX 200 but only if they break their latest, sharply rising trendlines. That leaves the S&P 500 and Shanghai Composite filling the minor placings.
Copper and Crude show signs of a recovery but the broad basket of currencies is expected to underperform stocks and precious metals.
The Greenback is expected to weaken against most major currencies, while rising inflation is likely to leave bond investors holding the wooden spoon.

Coronavirus: “We are all Keynesians now”

An economic depression requires a 10% (or more) decline in real GDP or a prolonged recession that lasts two or more years.

The current contraction, sparked by the global coronavirus outbreak, is likely to be severe but its magnitude and duration are still uncertain. After an initial spike in cases, with devastating consequences in many countries — both in terms of the number of deaths and the massive economic impact — the rate of contagion is expected to drop significantly. But we could witness further flare-ups, as with SARS.

Development of a vaccine is the only viable long-term defense against the coronavirus but health experts warn that this is at least 12 to 18 months away — still extremely fast when compared to normal vaccine development programs.

The economic impact may soften after the initial shutdown but some industries such as travel, airlines, hotels, cruise lines, shopping malls, and cinemas are likely to experience lasting changes in consumer behavior. The direct consequences will be with us for some time. So will the indirect consequences: small business and corporate failures, widespread unemployment, collapsing real estate prices, and solvency issues within the financial system. The Fed is going to be busy putting out fires. While it can fix liquidity issues with its printing press, it can’t fix solvency issues.

There are three key factors that are likely to determine whether countries end up with a depression or a recession:

1. Leadership during the crisis

Many countries were caught by surprise and the rapid spread of the virus from its source in Wuhan, China. South Korea, Singapore and Taiwan were best prepared, after dealing with the SARS outbreak in the early 2000s. Extensive testing, tracing and an effective quarantine program helped South Korea to bring the spread under control, after initially being one of the worst-hit.

Daily Increase - South Korea

South Korea: Initial Cases of Coronavirus COVID-19 (JHU)

The World Health Organization (WHO) did little to help, delaying declaration of a pandemic to appease the CCP. Economic and political self-interest has been the root cause of many failures along the way, including China’s failure to alert global authorities of the outbreak (they had already shut down Wuhan Naval College on January 1st). But this was aided by failure of many leaders to heed warnings from infectious disease experts in late January/early February. When they finally did wake up to the threat, many were totally unprepared, resulting in a massive spike in cases across Europe and North America.

Testing is a major bottleneck, with the FDA fast-tracking approval of new tests, but production volumes are still limited. Abbott recently obtained FDA approval for a new 5-minute test kit that can be used in temporary screening locations, outside of a hospital, but production is currently limited to 50,000 per day. A drop in the ocean. It would take 6 months to produce 9 million kits for New York alone.

Daily Increase - USA

USA: Initial Cases of Coronavirus COVID-19 (JHU)

Daily Increase - UK

UK: Initial Cases of Coronavirus COVID-19 (JHU)

Daily Increase - Germany

Germany: Initial Cases of Coronavirus COVID-19 (JHU)

Daily Increase - Italy

Italy: Initial Cases of Coronavirus COVID-19 (JHU)

Widespread testing and tracing, social-distancing, and effective quarantine methods have enabled some countries to flatten the curve. Australia may be succeeding in reducing the number of new cases but inadequate testing and tracing could lead to further flare-ups. One of the biggest dangers is asymptomatic carriers who can infect others. Flattening the curve is the first step, but keeping it flat is essential, and requires widespread testing and tracing.

Daily Increase - Australia

Australia: Initial Cases of Coronavirus COVID-19 (JHU)

The curves for North America and Europe remain exponential. They may even spike a lot higher if hospital facilities are overrun. Success in flattening the curve is critical, not just in minimizing the number of deaths but in containing the economic impact.

2. Economic rescue measures during the crisis

Rescue measures amounting to roughly 10% of annual GDP have been introduced in several countries, including the US and Australia, to soften the economic impact of the shutdown. More Keynesian stimulus may be needed if the coronavirus curve is not flattened. Layoffs have spiked and many small businesses will be unable to recover without substantial support.

3. Economic stimulus after the crisis

This is not a time for half-measures and the $2 trillion infrastructure program proposed in the US is also appropriate in the circumstances. Australia is likely to need a similar program (10% of GDP) but it is essential that the money be spent on productive infrastructure assets. Productive assets must generate a market-related return on investment ….or generate an equivalent increase in government tax revenue but this is much more difficult to measure. Investment in unproductive assets would leave the country with a sizable debt and no ready means of repaying it (much like Donald Trump’s 2017 tax cuts).

Conclusion

Social-distancing and effective quarantine measures are necessary to flatten the curve but widespread testing and tracing is essential to prevent further flare-ups. Development of a vaccine could take two years or more. Until then there is likely to be an on-going economic impact, long after the initial shock. This is likely to be compounded by a solvency crisis in small and large businesses, threatening the stability of the financial system. The best we can hope for, in the circumstances, is to escape with a recession — less than 10% contraction in GDP and less than two year duration — but this will require strong leadership, public cooperation and skillful prioritization of resources.

—–

“We are all Keynesians now.” ~ Richard Nixon (after 1971 collapse of the gold standard)

The Fed has no vaccine for COVID-19

The World Health Organization has not yet declared the COVID-19 coronavirus a global pandemic but investors are not waiting.

Spooked by the rapid explosion of cases outside of China — South Korea now has 2,931 confirmed cases and Italy 889; — and dire warnings from health professionals, investors are fleeing to safety.

The CDC on February 21st announced:

“We are not seeing community spread here in the United States, yet. But it is very possible, even likely, that it may eventually happen.

…..This new virus represents a tremendous public health threat. We don’t yet have a vaccine ….nor do we have a medicine to treat it specifically.

…..We are now taking, and will continue to take, unprecedented aggressive actions to reduce the impact of this virus.”

China claims to have the disease under control, reporting a sharp decline in new cases. But they have zero credibility after the massive suppression of information, frequent revision of statistics, and rapid disappearance of anyone who contradicts the official CCP line.

This report from Trivium China shows how CCP temporizing allowed the virus to spread:

China’s National Health Commission website published minutes from a meeting the NHC held with its provincial branches on January 14:

  • “The epidemic prevention and control situation has undergone important changes, and the spread of the epidemic may increase significantly, especially with the arrival of the Spring Festival……
  • [We must] implement the most stringent measures, control the epidemic locally, and do our best to avoid the spread of the epidemic in Wuhan.”
  • But the NHC didn’t give any public warning about the virus before January 20.

Severity of the disease should also not be underestimated. Of 43,940 active cases, 18% are listed as serious or critical, while 7% of 39,439 closed cases have died. The growing number of relapses, after the patient initially recovered, is also concerning.

China is going to find it difficult to restore business as usual with the constant threat of another outbreak. Activity remains well below normal levels.

China coal consumption

Official PMI figures point to a “brutal contraction” for China. February Manufacturing PMI plunged to 35.7, while Services were even lower at 29.6.

China PMI

It is difficult to estimate the economic impact of COVID-19 on the global economy. Profs. Warwick McKibbin and David Levine take a stab:

The novel coronavirus COVID-19 may become a footnote in history – a disaster narrowly averted. It could also become a global pandemic similar to some of the worst pandemics of the twentieth century. For example, assume the COVID-19 is as easy to spread and as dangerous as the 1957 Asian flu. Based on the epidemiological estimates of mortality and morbidity rates from that experience, our best estimate from a 2006 study on pandemics was that such a virus might kill more than 14 million people and shrink global GDP by more than $500 billion. These estimates are far higher than the costs were in 1957 because our world is increasingly connected and urban. Preliminary results currently being updated in 2020 suggest even higher numbers for worse case COVID-19…..[Brookings]

This is not a problem that the Fed can handle.

No doubt they will cut interest rates. Short-term Treasury yields (gray) are already falling in anticipation of another rate cut (green).

Effective Fed Funds Rate (EFFR), Interest on Excess Reserves (IOER), and 3-Month Treasury Yield

When consumers are scared, rate cuts will not restore normal consumption patterns. This is both a demand and a supply shock. A virus outbreak would cause consumers to drastically curtail demand: use of public transport, holiday travel, business travel, hotel occupancy, visits to restaurants, shopping malls, sporting events and other public venues. Fast food consumption and discretionary shopping would be especially hard hit.

But supply is also likely to contract due to interruptions to supply chains and shipping logistics, slowing manufacturing output.

Donald Trump may call this a “hoax” but I don’t see him taking any hospital tours, to review preparations. If the virus does spread as anticipated, he is unlikely to win re-election.

The Coronavirus Threat

Spread of the novel coronavirus (2019-nCoV) is a “global health emergency” according to the World Health Organization (WHO). Restricted travel is already having an impact on the global economy, with Goldman Sachs anticipating a 0.4% fall in U.S. annualized GDP growth in the first quarter.

Imperial College in London estimates a dangerously high transmission rate for the disease:

Self-sustaining human-to-human transmission of the novel coronavirus (2019-nCov) is the only plausible explanation of the scale of the outbreak in Wuhan. We estimate that, on average, each case infected 2.6 (uncertainty range: 1.5-3.5) other people up to 18th January 2020, based on an analysis combining our past estimates of the size of the outbreak in Wuhan with computational modelling of potential epidemic trajectories. This implies that control measures need to block well over 60% of transmission to be effective in controlling the outbreak….

Johns Hopkins University CSSE reports 11,374 confirmed cases with 259 deaths and 252 recoveries as of 7.00 p.m. on January 31, 2020. Growth of the  number of reported cases in Mainland China appears linear, with an increase of 1,700 per day.

JHU CSSE 2019-nCOV spread

That seems highly suspicious when one compares to mathematical modeling and to social media reports from medical staff on the ground. Contagion rates are likely to grow exponentially, rather than in a straight line, and will only peak when authorities are able to bring the transmission rate below 1.0 (compared to the 2.6 posited by Imperial College).

A report in the Epoch Times suggests that Chinese public health authorities have suppressed the reporting of confirmed cases:

“The outbreak of Wuhan coronavirus is far bigger than the official figures released by Chinese public health authorities who cover up the severity by limiting the number of diagnosis kits to Wuhan hospitals, according to an insider and an independent journalist.

The insider and the independent journalist both say that diagnosis kits are only provided to certain ‘qualifying hospitals’ and in very limited quantities. Medical personnel at these hospitals have said that the number of kits they are supplied is less than 10 percent of what they need to test patients.

Now these hospitals claim that their responsibility at present is to provide treatment only, and they will not perform any diagnoses.”

UK researcher Jonathan Read projects that the epidemic in Wuhan will reach 191,529 by February 4 (prediction interval 132,751-273,649). Chart A shows total number of infections in black and new infections per day in red.

2019-nCOV predicted infection rate - Wuhan

2019-nCOV predicted infection rate - Mainland China

Restriction of road, rail and air travel to/from Wuhan is expected to achieve between 12.5% and 25% reduction in cases in the above areas.

2019-nCOV predicted infection rate - World

Importations into other countries may also be slowed by travel restrictions.

Mortalities are not limited to young children and the elderly and infirm as with most influenza viruses. Healthy adults, including health care workers, are dying. Reported recoveries (252) are low and provide an indication as to the severity of the infection.

Modelling suggests that the number of cases will double every seven days until it peaks. The peak number of cases will depend on how long it takes to contain the outbreak. Another four weeks would pose a serious threat to the global economy.

Where Fortune is concerned: she shows her force where there is no organized strength to resist her; and she directs her impact there where she knows that no dikes and embankments are constructed to hold her. ~ Niccolo Machiavelli, The Prince (1532)

Trump gets his Deal

Donald Trump signed the Phase One US-China trade deal with China’s Vice-Premier Liu He in Washington D.C. on Wednesday.

The deal is important for Trump politically as he needs to disrupt media focus on his impeachment playing out in the Senate.

China attempted to downplay the significance of the deal by sending their Vice-Premier rather than Xi Jinping for the signing ceremony. But the deal is no less important for them in order to halt/slow the relocation of manufacturing jobs by multinationals to avoid US tariffs.

Trivium China sum up the outcome:

  1. We are still in a trade war. Tariffs remain levied on hundreds of billions of USD worth of goods.
  2. A phase two deal looks dead in the water. US President Trump has already said that he might wait until after the November election to negotiate the next phase. More importantly, there is little appetite in China to make concessions on any of the remaining issues.
  3. Third countries are getting screwed. China’s overall import bill is unlikely to jump by USD 200 billion over the next two years, so increased purchases of US goods will come at the expense of producers in other countries.
  4. This deals another blow to the multilateral trading system. The world’s two largest economies just bypassed the multilateral rules-based system to negotiate a deal that undermines the principles of free trade.
  5. China is downplaying the deal. The fact that Liu He – not Xi Jinping – signed the deal sent a strong signal domestically that this is not a big deal. And Chinese officials have said that most of these measures would have happened irrespective of a deal.
  6. Finally, the deal is a positive for stability. This will serve to halt – or at least slow – economic decoupling. That’s a positive for the global economy and security.

Rhodium Group in The Good, The Bad and The Missing focus on what should have been in the deal but isn’t:

  1. Chapter 1 Pledges greater protection for a handful of specific products – pharmaceuticals, medicines and unlicensed software – and generally more enforcement against counterfeit products but the concerns of other industries are not addressed
  2. There are no robust enforcement mechanisms in Chapter 7. It provides a forum for discussion and consultation but not arbitration. If unable to resolve the issue, the aggrieved party can withdraw from the Agreement. This creates little incentive to resolve issues and may result in a logjam.
  3. The managed trade approach does not even start to remedy systemic concerns like the predominance of state enterprises, the prevalence of foreign investment limitations in the vast set of industries that did not get early attention in this deal, the lack of consistency in competition policy treatment and the general asymmetry of information and the playing field for private firms foreign and domestic.
  4. Phase One fails to address growing challenges at the intersection of economics and national security: Huawei and 5G telecommunications, detentions and pressure on expatriates and travelers from the other side, foreign investment screening and export controls, and the threat of financial decoupling.

Rhodium concludes:

The agreement is a limited one, primarily capping the potential for further escalation of protectionism on both sides rather than taking serious steps to address long-standing issues in Chinese trade practices. The managed trade outcomes in which China promises additional US imports are the most significant substantive commitments made, but China’s capacity and willingness to meet these targets remains in question. Significant tariffs remain in place on both sides, uncertainty about the future path of the US-China relationship will persist, and the broader decoupling trends in security-sensitive areas of the bilateral relationship will continue. Progress toward any Phase Two agreement is likely to be minimal in 2020. (The Chinese side immediately said after the January 15 signing that it wanted to go slow before any further talks.)

The deal attempts to head off further escalation but falls well short of addressing long-standing issues with Chinese trade practices. Trade tensions and decoupling are likely to continue.

Cracks are showing in China’s Debt Markets

“You only learn who has been swimming naked when the tide goes out…” ~ Warren Buffett

Beijing’s de-leveraging campaign, to set the economy on a sustainable path, is starting to expose some of the excesses in financial markets.

Local Government

Local governments owe some 49 trillion yuan (about $7 trillion or 50% of China’s GDP) in off-balance-sheet debt through local government finance vehicles (LGFVs). LGFVs generate no income themselves and are reliant on revenue flows from the city government to service the debt. Local governments in the past generated substantial revenue through land sales but dwindling sales make debt servicing a challenge. Many LGFVs are experiencing cash flow problems and have resorted to borrowing in shadow finance markets to meet their commitments. Interest rates are close to 10% and will simply accelerate the inevitable implosion.

This map from Rhodium highlights the most severely affected LGFVs, where debt in some cases exceeds 30 times local government revenues:

China: City Level Financial Stress

China’s Ministry of Finance (MOF) is attempting to keep a lid on the problem, offering long-term low interest loans from China Development Bank to repay shadow financing. Zhenjiang, an eastern city of Jiangsu province was one of the first beneficiaries, in March 2019. But debt substitution merely prolongs the crisis unless the city can sell off marketable assets to repay debt. Marketable assets which are, in many cases, proving hard to find.

This detailed report from Rhodium examines the problem.

State-owned Enterprises (SOEs)

We are also witnessing a $1.25 billion default by local government-owned Tewoo Group:

“China’s Tewoo Group has forced investors to take losses on a US dollar bond, marking the largest failure to repay dollar debt by a state-owned company in two decades….The commodities trader, which is wholly owned by the city government of Tianjin, completed an exchange offer this week that made investors take significant discounts on their holdings in the company’s debt.”
“The offer was ‘tantamount to a default’, S&P Global Ratings said on Thursday.” ~ FT.com

Based out of Tianjin, Tewoo is a bulk trader of commodities such as metals (ferrous & nonferrous), energy, minerals and chemicals….

In 2017, it had a turnover of $66.6 billion with profits of $122 million and was ranked 129th in the Fortune Global 500 list & 28th in the Chinese enterprises list. The company employs more than 19,000 professionals and has operations across the US, Germany, Japan and Singapore.

Tewoo’s financial challenges are closely linked to Bohai Steel Group, a business associate which has filed for liquidation due to high leverage. Bohai’s bankruptcy in 2018 triggered systemic risk in Tianjin’s financial market and Tewoo has been facing serious liquidity challenges in recent months. ~ MoneyControl

Bank Bailouts

Many small and medium-sized banks are overly reliant on wholesale markets for funding and tightening credit has left them high and dry.
Barclays Research highlighted a number of banks that had failed to submit their 2018 annual reports on time (source Zero Hedge/Macrobusiness):

China: Troubled Banks

  • Baoshang Bank underwent a state takeover in May.
  • Bank of Jinzhou was taken over by state-owned strategic investors in July.
  • Heng Feng Bank was taken over by China’s sovereign wealth fund in August.
  • Troubled Anbang Insurance Group is selling a 35% stake in Chengdu Rural Commercial Bank to “an investment firm owned by the southwestern city of Chengdu.” (Caixin)

While, according to Caixin:

“China’s Hengfeng Bank will raise 100 billion yuan ($14.21 billion) through a private placement to a group of state and foreign investors…..The troubled Shandong-based lender will issue 100 billion shares, Hengfeng said Wednesday in a statement.”

Foreign investment is simply window-dressing, with Singapore’s United Overseas Bank subscribing for 4% of the new issue. Probably with a “put” on the other state-owned purchasers.

“The bailouts for China’s troubled small banks roll on……China’s sneaky system-wide bank bailout is well underway.” ~ Trivium China

Efforts by Beijing to curb exponential debt growth are praiseworthy, but are likely to come at a substantial cost. Expect GDP growth to slow and gradual “Japanification” as the state attempts to avoid hard choices, supporting the continued existence of “zombie” companies ……and sclerosis of the Chinese economy.