
Two Large Chinese Borrowers Miss Bond Payments, Sources Say - docker_up
https://www.bloomberg.com/news/articles/2019-02-11/two-large-chinese-borrowers-are-said-to-miss-bond-payments
======
Animats
Uh oh. Wintime, which is a coal mining operation, owes about US$46 billion.
They did a financial restructuring last year, and now they can't make the
payments on that. "Wintime's original plan was to borrow to fund acquisitions
and expand into areas including finance and logistics." That didn't end well.

China has "modernized" their bankruptcy system since 2007, with a more pro-
creditor legal system and new bankruptcy courts. China now allows defaults,
creditor-in-possession operation ("Chapter 11" in the US), and most of the
other creative stuff seen in US debt finance. Now companies in China can try
all the stupid debt side stuff we see in the US. But without enough people
who've seen it before on the lending side to evaluate credit risk.

In 2016, President Xi Jinping began putting emphasis on reining in financial
risks. The tolerance for creative financing was reduced. Wintime's expansion
plans may have been caught by this.[1]

[1] [https://www.smh.com.au/business/markets/looks-like-a-
ponzi-s...](https://www.smh.com.au/business/markets/looks-like-a-ponzi-scheme-
china-s-debt-mountain-is-growing-20180719-p4zsdh.html)

~~~
shaki-dora
There is nothing stupid with Chapter 11. The owners get nothing until all
creditors are made full, so the incentives work just as well as under
alternative regimes. The difference is simply that there is a chance for the
business to continue. Which is really better for all involved, creditors,
employees, customers, and vendors.

The alternative alternative, i. e. starting from the assumption that business
must shut down, is really a legacy of the times when a business and its owners
were hard to separate. There may also be some sort of misplaced morality at
play, where „Radio Shack must die“ to atone for the sin of running out of
money.

~~~
AngryData
What about the contractors that get regularly screwed over from this? "Sorry,
I know we agreed to pay for your time and work, but we declared bankruptcy and
paid off most of the bank's debt and nothing is left for you small fry! Good
luck sueing us with your non-existant legal team! I just got a bonus for
fucking you over and saving the company the money!"

~~~
pault
I worked for a small design agency that got stiffed on a six figure invoice
this way. There was absolutely nothing they could do about it and the bankrupt
founder didn't even bother apologizing. It almost killed a 10 person company
that the studio head had spent a decade building up from a sole
proprietorship.

~~~
nradov
The design agency shouldn't have extended so much credit in the first place.

------
chollida1
IMO, not all that informed, This is the Chinese government picking winners and
losers as it tries to deleverage itself from what it did in 2008.

(As a side note, China doesn't get enough credit for what it did in 2008 to
stabilize the global markets. It and the US literally spent their way out of
what could have been a very brutal global recession)

Last year they bailed out HNA. Lots of chatter that HNA was bailed out because
it had done some very high profile deals in the first world and China wanted
to protect its reputation.

[https://www.bloomberg.com/opinion/articles/2018-01-24/hna-
sh...](https://www.bloomberg.com/opinion/articles/2018-01-24/hna-shuffle-
heralds-start-of-the-great-china-bailout)

The good news for the world is that Chinese corporate debt isn't held that
much outside of China, due to tge double whammy of

1) investors valuing their chance of payback on a default like sovereign
debt(large haircuts, very little leverage to get any say in the proceedings)

2) investors valuing the chance of a default like a corporate bond( much
higher than sovereign defaults).

This means it has the worst of both worlds from a risk perspective but does
pay a larger coupon. And if you are a distressed credit investor you have the
same problem that is now an issue in most markets. You can be right about the
default chances but the government could still swoop in and bail out the
company making your fundamental analysis worthless.

The Chinese debt market tanking isn't going to hurt markets in a first order
way. What could cause grief would be a scenario like the mid =80's where Japan
almost on a dime stopped spending money around the world and brought it all
back home to help fight their recession.

If China starts selling global assets, like housing in major cities around the
world, and starts to decline their treasury holding rather than rolling them,
then look out.

~~~
ThrustVectoring
Chinese corporate debt isn't held much outside of China because of Chinese
capital controls, too - domestic investors looking for returns are often
constrained to domestic markets, thus bidding up prices and lowering returns.
The same phenomenon explains in part the excessive real estate construction in
China: there's often little other good places for domestic investors to park
their money.

~~~
cargo8
Is real estate still a "great investment" in China when you can't own property
but merely buy 75 year leases? (this is my understanding of how real estate
works at least in Shanghai)

~~~
vkou
Is real estate in America a great investment[1], when despite owning property,
you have to pay 2% of its value in taxes/year? In a mere 50 years, the
government will own your entire property!

China's property is leased... But as a converse, it doesn't have any property
taxes.

At the end of the day, the difference between a fixed-term lease, and a
property tax are largely academic. (With a bit of economic weirdness, close to
the roll-over period of the lease.)

[1] Which also begs the question - _should_ real estate be a great investment?
Nobody cheers when the price of staples and groceries goes up...

~~~
CWuestefeld
_pay 2% of its value in taxes /year? In a mere 50 years_

<pedantic> More like 36 years. </pedantic>

There's a quick trick to a good approximation for this. The rule of 72 says
that you can estimate the time it takes a compounded investment to double by
dividing the interest rate by 72. 2% for 36 years will double the investment
(or, since your actual statement was going the other way, strip it to nothing)

See, for example, [https://www.investopedia.com/ask/answers/what-is-the-
rule-72...](https://www.investopedia.com/ask/answers/what-is-the-rule-72/)

~~~
ves
There’s no compounding here, since the property tax is a fee and not a
reduction in the value of the asset, so I don’t think that’s applicable.

~~~
xxpor
It's not a direct reduction in value, but I would think if the fee went away
the value would still increase.

------
ivalm
On the one hand, talk about Chinese bond market blowing up are at least 8
years old at this point. On the other hand, combined with slowing growth, this
might be a catalyst for some broader debt crisis [0]. US corporate borrowing
is also ATH [1] and even for consumer debt we are currently at the highest
autoloan delinquency rate ever [2].

[0] [https://chinapower.csis.org/china-face-looming-debt-
crisis/](https://chinapower.csis.org/china-face-looming-debt-crisis/)

[1] [https://www.wsj.com/articles/corporate-debt-is-reaching-
reco...](https://www.wsj.com/articles/corporate-debt-is-reaching-record-
levels-11546099201)

[2] [http://fortune.com/2019/02/12/americans-late-on-car-
payments...](http://fortune.com/2019/02/12/americans-late-on-car-payments/)

~~~
onlyrealcuzzo
Why is it an alarm bell if China is still growing at basically the fastest
rate in the world? Is China's inflation super high that it needs a faster
growth rate than other countries for some reason? China's population growth is
quite low, so I don't see why it would need a faster rate of growth.

I'm always confused why people make such a big deal of China growing at ONLY
5% a year. If the US grew at 5% this year, we'd be dancing in the streets!

Edit: Thanks for the comments, you guys are amazing!

~~~
azernik
Because China has a few long-term problems it's trying to grow its way out of:

* A baby bust left over from the introduction of the one-child policy, at which point its dependency ratio will skyrocket to levels unmatched in any other industrialized country. One phrasing I've heard is that China needs to get rich before it gets old

* Environmental damage that takes money to reverse (that is, to reverse while maintaining living standards). Environmental damage in the sense of damage to the urban environment that industrial workers live in, not just to wilderness areas - unbreathable air, toxic rivers, etc.

* A large rural population whose urbanization is unstoppable, and whose urbanization needs to be supported by jobs and housing to avoid the kind of slums you see in e.g. Brazil or Nigeria and attendant civil disorder. Which brings us to:

* An autocratic political system whose popular legitimacy is built on economic growth, and whose popularity will (in the eyes of the people running it) collapse if it can't deliver truly spectacular economic results.

~~~
Pharmakon
_Environmental damage that takes money to reverse (that is, to reverse while
maintaining living standards). Environmental damage in the sense of damage to
the urban environment that industrial workers live in, not just to wilderness
areas - unbreathable air, toxic rivers, etc._

It’s also a matter of being able to grow enough food for 1.3 billion people,
and in the absence of that, experience extreme dependency on foreign sources
of food. Part of that is down to local pollution and mismanagement, but part
of it also a matter of global climate change and desertification. It’s hard to
be a superpower if you depend on your geopolitical opponents to feed you.

~~~
baybal2
Reminds me of how the Soviet Union having to import simple _wheat_

------
narrator
Yup, the investors are going to lose their money. So what. This won't start
cascading bank failures though because the PBOC can print as much money as
they want to recapitalize the banks without burdening the taxpayer. This is a
fundamental difference between the western and european systems and is why
China hasn't had a Japanese style deflation, even though it has been predicted
every year since the early 90s.

Analysts have been getting it wrong for almost 30 years, yet they refuse to
question their models because credit cycles are believed to be physical laws
of the universe, when really they are artifacts of western financial policy.
Namely, fractional reserve banking and all money as debt which the Chinese
government doesn't follow.

I know what you're thinking now. "Fractional reserve banking" and "all money
is debt" is a dog whistle for libertarians. Thus, this guy must be a gold bug,
etc. No. I am saying that this is fiat currency, and that's ok. It's just not
managed in the screwy boom-bust way that we have in the west that's
specifically made to separate people from their assets every 8 or 9 years. Not
everything China does is a good thing, but their financial system hasn't
crashed in decades, so empirically it is a lot more stable.

~~~
matt4077
This must indeed be first comment ever using the terms „fractional reserve
bank“, „printing money“, „fiat“, „gold“, and „debt“, but not „inflation“.

Which is really a shame because it’s the obvious result. And also a very good
way to specifically separate people from their assets. And also pensions.

~~~
neilwilson
Inflation issues are also down to another western belief - venerating 'price
competition' as the only pure way to resolve resource conflicts.

The Chinese don't work that way. If there is a conflict for resources, those
with the power just take them. If there is compensation offered for that,
those without the power just get given it - and probably consider themselves
lucky.

The Chinese show you can have a system where you set a price, even one as low
as zero, and then use coercive power to force people to take that price.

Those with power don't need to get into price competition. And if they don't
get into price competition, then prices won't go up. Inflation is killed at
source.

------
hangonhn
This is actually a positive development in the long run. A few years ago my
father, who lives and invests in China, boiled down the basic investment
strategy in China to: invest in big companies because the government will
always bail them out. If that's what everyone believed then you can see how
some very poor decisions can be made and debts can balloon without end.
Disasters like these will remind Chinese investors that there are risks. There
are no free lunches and be prudent about your investments. This is part of the
process of modernizing the Chinese economy.

------
mooreds
Wow. Wonder if this is the canary in the coal mine for the Chinese economy
slowing down.

~~~
geggam
s/China/Global

Everything is connected and this level of debt has never been seen before.
Next decade should be an interesting ride

~~~
khuey
Because of Chinese capital controls they're connected less than one might
expect.

~~~
seanmcdirmid
Well, unless you are into Vancouver real estate.

------
paulpauper
The S&P 500 is up 40pts today, although unrelated, is evidence that the market
is not concerned. Missed bond payments happen all the time. In 2014-2015 many
oil and drilling companies missed payments when oil prices fell. This sector
is very volatile. .

~~~
dageshi
I think the US markets aren't concerned because Chinese corporate bonds are
basically internal to China. In otherwords, USA exposure to Chinese credit
problems isn't that great?

------
chiefalchemist
How much of this is legit missing, and how much of it is a ploy (?) to
restructure payments? That is, is a temporary hit to reputation / confidence
acceptable if the longer term benefit to the bottom line is significant
enough?

~~~
matt4077
Good luck trying to get cheaper financing after missing a few payments.

~~~
chiefalchemist
Yes and no. In the case of China and the Chinese gov, well that's not Wall
Street.

------
ziont
Why is this link keep getting posted repeatedly?

16 hours ago it was already submitted here :
[https://news.ycombinator.com/item?id=19140804](https://news.ycombinator.com/item?id=19140804)

Strangely, it was quickly hidden and one of the comments pointed to this
explanation of how shadow banking works in China and the potential risk.

[https://www.youtube.com/watch?v=auiGFRmD0tg](https://www.youtube.com/watch?v=auiGFRmD0tg)

Essentially, these two large borrowers missing bond payment is a signal of
worst to come.

It's not a question of if or when such crash will come but who will go down
first and the big question: Can Chinese leadership be able to survive this
time around? Deng Xiaopeng's remedy to deteriorating grip on the country was
market capitalism, but now that it has proven to be largely a failure with
half a billion Chinese living in poverty or barely what is considered Standard
living in the west, with no political free will and expression protected, how
long can the people bare it?

There are already signs of simmering tensions between the state and people.
Much like leading up to the Tianmen Square incident 40 years ago in 1989, we
are seeing similar themes - the rise of student activists with little to
nothing to lose, a deteriorating economy now on the verge of misnky effect,
now with a KGB puppet applying pressure via trade sanctions....

I estimate some major event taking place after the North Korea-America summit,
the outcomes of that meeting will determine what chips China will use to get
America off it's back.....

yup, you guessed right, another nuclear test this year along with ICBM/SLBM
tests, launching skirmishes in NLL zone....

OR

another tianmen square unfortunately...as Chinese leadership realizes
America's not about to go easy, it will have no choice but to kill it's own
citizens who will riot when they los their jobs and savings.

The domino chips are all set in place, and it's just waiting for that final
push.

~~~
benj111
"now that it has proven to be largely a failure with half a billion Chinese
living in poverty"

What?

China has risen to superpower status, and become one of the biggest economies
in the world in the space of a generation.

Are they as rich as the US per capita? No, but they're on the right
trajectory, and getting there quicker than most other nations did.

Don't forget nearly all these city dwellers are first generation, if they
don't remember living in a wood hut, without electricity, running water or
toilet, their parents do.

~~~
ziont
> superpower status

says who?

> Are they as rich as the US per capita? No, but they're on the right
> trajectory, and getting there quicker than most other nations did.

Japan thought the same thing up until 1989

~~~
mikeash
China was a complete shambles in 1949. If you're implying China is now on par
with Japan of 1989, they're doing _great_.

