{"id":19585,"date":"2019-12-20T06:39:27","date_gmt":"2019-12-20T06:39:27","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=19585"},"modified":"2019-12-20T06:43:18","modified_gmt":"2019-12-20T06:43:18","slug":"cracks-are-showing-in-chinas-debt-markets","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2019\/12\/20\/cracks-are-showing-in-chinas-debt-markets\/","title":{"rendered":"Cracks are showing in China’s Debt Markets"},"content":{"rendered":"

“You only learn who has been swimming naked when the tide goes out\u2026” ~ Warren Buffett<\/p><\/blockquote>\n

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

Local Government<\/h2>\n

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.<\/p>\n

This map from Rhodium highlights the most severely affected LGFVs, where debt in some cases exceeds 30 times local government revenues:<\/p>\n

\"China:<\/p>\n

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.<\/p>\n

This detailed report from Rhodium<\/a> examines the problem.<\/p>\n

State-owned Enterprises (SOEs)<\/h2>\n

We are also witnessing a $1.25 billion default by local government-owned Tewoo Group:<\/p>\n

\u201cChina\u2019s 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\u2019s debt.\u201d
\n\u201cThe offer was \u2018tantamount to a default\u2019, S&P Global Ratings said on Thursday.\u201d ~ FT.com<\/a><\/p><\/blockquote>\n

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

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.<\/p>\n

Tewoo\u2019s financial challenges are closely linked to Bohai Steel Group, a business associate which has filed for liquidation due to high leverage. Bohai\u2019s bankruptcy in 2018 triggered systemic risk in Tianjin\u2019s financial market and Tewoo has been facing serious liquidity challenges in recent months. ~ MoneyControl<\/a><\/p><\/blockquote>\n

Bank Bailouts<\/h2>\n

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

\"China:<\/p>\n