Here’s Why The Market Is Shrugging At TBE’s “Promise” Not To Default In July

Here’s Why The Market Is Shrugging At TBE’s “Promise” Not To Default In July

The “good” news this evening is that Baoding Tianwei Baobian Electric Co (TBE), the company which as recently as two days ago was rumored to be the second “imminent” Chinese corporate bond default which sent copper to multi year lows, has issued a statement that it will not default on its upcoming interest payment (due July 11th – so how the delisted company is convinced it will have enough cash four months from now is a mustery). The “bad” news is that markets don’t care. There is a slight whiff of positivity in Copper futures but aside from that, weakness continues in China’s corporate bond and stock market. Simply put, the market gets it – this is no longer about the next idiosyncratic bond (or trust) to default; this is about Xi’s renewed confidence in efforts to ‘clean up’ the mounting local government and corporate debts and shrink the shadow-banking bubble. This is systemic, and the markets know it.



Copper was excited momentarily…

TBE statement: (link)

Co. will pay bond interest for due July 2014 on time, according to a statement to the Shanghai stock exchange.

So to be clear, TBE is promising that in 4 months it will pay interest on a bond that it currently has zero liquiidty to pay, is losing money, and is in an industry that the government has specifically targeted for ‘normalization’…

BofA explains why is it not a big piece of news in China?

To the Mainland China media, the delisting of TBE bonds is not a big piece of news, in our view, because TBE was already in a law suit on its other debt, and the “new energy” sector has been in deep trouble anyway (as we have seen with Wuxi Suntech and Chaori). TBE is in the business of making power transmission equipment, but in recent years has heavily invested in the ill-fated new energy sector which has resulted in two straight years of losses with the losses in 2013 surging to RMB5.2bn. TBE’s Shanghai Stock Exchange listed bond was issued in 2011, with principal at RMB1.6bn, a 5.75% yield and 7-year tenor. TBE’s stock price has already fallen by 15% this year. TBE’s controlling shareholder is Tianwei Group, which is a central-government owned company.

We do see a significant rise in bond and trust loan defaults We believe the chance of corporate bond and trust loan defaults will rise significantly in 2014 as a more confident President Xi Jinping and Premier Li Keqiang will aim to seriously clean up mounting local government and corporate debts.

As Li himself noted,

Though Mr Li said that  

From November 2012, The Chinese Credit Bubble – Full Frontal:


Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.

Finally, what everyone learned over the past month, is that as the two massive, and unresolvable forces, come to a head, the first cracks in the facade are starting to appear as first one then another shadow-banking Trust product failed and had to be bailed out in the last minute.

However, as we showed again last week, the default party in China is only just beginning as Trust failures in the coming months are set to accelerate at a breakneck pace.

So as Moody’s noted:

Analysts see more such defaults in the coming months in sectors with overcapacity, such as steel and mining, as crackdowns on careless loans continue. “The lack of intervention is consistent with the central Chinese government’s adoption of more market-oriented policies, which include increased tolerance for corporate bond defaults, as it reforms the country’s financial markets,” Moody’s said in a commentary after the default.

In conclusion, one default here or there now is no longer relevant as the first crack in the damn has been made. Risk will be re-priced… confidence has been broken that money is free and 10% yields are riskless… finally, as we previously noted in great detail, here are the next steps

The question, however, in addition to “why”, is whether the Fed also agrees with BofA’s stunningly frank, and quite disturbing conclusion, perhaps finally realizing that aside from the US, the biggest house of cards that would topple once the “flow”-free emperor is exposed in his nudity, is that of the world’s largest “growth” (and credit) dynamo of the past two decades – China. Because, as noted above, if Lehman’s collapse was bad, a deflationary collapse brought on by Chinese hard landing coupled with a full unwind of the global carry trade, would be disastrous and send the world into a depression the likes of which have never before been seen.

Finally, for those who want the blow by blow, here is BofA’s tentative take of what the preliminary steps of the next global great depression will look like:

If we do experience a sizable default, the knee-jerk market reaction will be cash hoarding since it will strike as a big surprise. Thus, we expect the repo rate to rise first, while the long term government bond would get bid due to risk aversion flows.

However, what follows will be quite uncertain, aside from PBoC injecting liquidity and easing monetary policy to help short term rate come down. It has been proven again and again the Chinese government will get involved and be proactive. The bond market reaction will be different depending on the government solution.

Alas, at that point, not even the world’s largest bazooka will be enough.

At this point one should conclude that reality – through massive, unprecedented liquidity injections – has been deferred long enough. It is time to let the markets finally return to some semblance of uncentrally-planned normalcy: there is a reason why nature abhors a vacuum. Even if it means the eruption of the very painful grand reset, washing away decades of capital misallocation, lies and ill-gotten wealth, so very overdue.

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