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China Starts to Crack?

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  • China Starts to Crack?

    Some will recall my longstanding assertion that one important element of the so-called "Chinese Miracle" was (is?) the longest and greatest misallocation of capital in human history.

    Stein's Law states "If something cannot go on forever, it will stop" (Dr. Herbert Stein, 1976).

    Too early to tell if it has actually stopped (I have my doubts), but perhaps the early signs that it "cannot go on forever". A Chinese State Owned Enterprise (SOE) is giving holders of a series of its US$ denominated offshore bonds fresh haircuts (with Chinese characteristics, LOL?). Discounts to face value of 33% to 64%. OUCH!

    Tewoo bondholders invited to tender at discount or exchange for TSCI bonds

    SINGAPORE, Nov 25 (IFR) - Holders of Tewoo Group's US dollar bonds have been invited to tender them for cash or exchange for new bonds from Tianjin State-owned Capital Investment and Management.

    Commodities trader Tewoo is a wholly owned subsidiary of the Tianjin State-owned Asset Supervision and Administration Commission, but has had difficulties servicing its debt.

    Earlier this month Tewoo appointed Tianjin State-owned Capital Investment and Management (TSCI), a finance arm of Tianjin government founded by Tianjin State-owned Assets Supervision and Administration Commission and Tianjin Bohai State-owned Assets Management, to manage its offshore debts and implement debt management measures.

    Under the proposal, holders of Tewoo's US$1.25bn offshore bonds can choose to tender them for cash at a discount to face value or exchange them at par for new bonds issued by TSCI.

    Holders can tender the US$300m 4.5% bond due on December 16 this year and receive US$667.28 per US$1,000 in principal;
    US572.78 per US$1,000 for the US$300m 4.625% bond due April 6 2020; US$530.89 per US$1,000 for the US$200m 5.5% bond due April 6 2022; and US$360 per US$1,000 for the US$450m 5.8% senior perpetual bond callable in March 2021.

    Alternatively, they can exchange the 2019s for new zero-coupon bonds issued by TSCI and due 2024; the 2020s for 0.15% bonds due 2026; the 2022s for 1.55% bonds due 2029; and the perps for 1.60% bonds due 2039...

    ...Tewoo also has US$500m 3.15% credit-enhanced bonds due on December 1 2020, but these are not included in the offer. The bonds, issued in 2017 through Tewoo Group No 4, came with a standby letter of credit from ICBC's Tianjin branch, and the company said ICBC would pay the next coupon on December 1.

    Last edited by GRG55; 11-30-19, 03:57 PM.

  • #2
    Re: China Starts to Crack?

    Oh My God!
    Somebody else posted something!

    China a Ponzi? bet but so is much of the rest of the World.

    Its Iran an watching right now, at "work" we noticed a Flood of Iraians trying to get to Blighty by any method they can, like using inflatable boats to cross the channel!

    In Iran there is must rioting going on, over 700 bank branches burnt to the ground......2nd Iran revolultion coming?



    • #3
      Re: China Starts to Crack?

      You lazy bastards
      Sorry GRG looks like its just you & I............


      • #4
        Re: China Starts to Crack?

        Originally posted by Mega View Post
        You lazy bastards
        Sorry GRG looks like its just you & I............
        There's not much to say in an environment of rampant government intervention. Is this the beginning of the end for China's Ponzi economy? It doesn't look it to me since, as I understand it, only foreign investors are affected by this haircut. Meanwhile, I'm sure the CCP will continue to endlessly bail out domestic investors to prevent a revolution.

        I suspect that China's economy will only crash hard when developed nations cease conducting trade with China until the country implements earnest reforms. Considering that mercenary executives in the west (and especially America) still seem okay with technology transfers, offshoring, and other idiotic business decisions, the money will continue to flow for China. Furthermore, Trump's apparent desire to enter into a trade agreement with China (based on meaningless pledges the Chinese will not honor) also makes me think China's not going to go bust, at least not until the U.S. does so first.


        • #5
          Re: China Starts to Crack?

          Originally posted by Milton Kuo View Post
          as I understand it, only foreign investors are affected by this haircut.
          do we really know that? yes, they are dollar denominated bonds, but that doesnt mean that none are held by domestic chinese entities. the shock here, of course, is that it's an soe defaulting, not just a private company [to the extent that private companies even exist in china any more, in this age of civil-military fusion]. but do we know who holds the bonds in question?


          • #6
            Re: China Starts to Crack?

            Originally posted by jk View Post
            do we really know that? yes, they are dollar denominated bonds, but that doesnt mean that none are held by domestic chinese entities.
            I am guessing that only foreign investors are involved especially since wealth-management products that have blown up in the past have been bailed out. Large entities or very wealthy individuals in China who don't want to put their money in RMB have ways of doing so without buying crappy SOE bonds that are denominated in dollars. For the general public, I'm not sure if these bonds would be available to them on local bourses. I could wrong, of course, but given the existence of A-shares and H-shares (if I remember the terminology correctly), I would not be surprised if the typical Chinese citizen, outside of gold, cannot legally invest in anything that isn't RMB-denominated.

            [December 2, 2019; 12:41 CST]

            Here are two other articles that, due to their terminology, make me believe that it is foreign bond holders who are going to lose money with Tewoo.


            Note above the use of the term "offshore debt" in the article title. Another news article on Tewoo is this one:

            Since the first SOE bond default emerged in China’s domestic market four years ago, 22 such firms have failed to make good on a combined 48.4 billion yuan ($6.9 billion) onshore bonds as of the end of October, according to Guosheng Securities Co.

            In this article, Bloomberg uses the term "onshore bonds" which sounds like China's domestic bond investor market.
            Last edited by Milton Kuo; 12-02-19, 01:45 PM.


            • #7
              Re: China Starts to Crack?

              Looking at the wider picture I see Poland has just got 100 tons of Gold from the Bank of England...........China lost most of its pig stock due to swine flu...........things haapening


              • #8
                Re: China Starts to Crack?



                • #9
                  Re: China Starts to Crack?

                  Just read this thread, open ZH and find:
                  Does that means no problems for China...? I think nope. But dependance on the USA for thechnology seems to be dwindling. As for finantial disorder I think inflation is the big risk out there. You can inflate debts endlessly until inflation surges. So far I understand inflation in China is up, mainly due to the pork problem. Let's see


                  • #10
                    Re: China Starts to Crack?

                    Originally posted by Southernguy View Post
                    Does that means no problems for China...? I think nope. But dependance on the USA for thechnology seems to be dwindling.
                    I don't think anyone believes the cockamamie financial books of Chinese companies or the Chinese government itself. However, all the malinvestment in China has created a lot of real, physical infrastructure and created technology companies with know-how and some capability to manufacturing fairly high-tech product. When the Chinese bubble pops, the assets will be picked clean by Chinese vultures, not foreign vultures. So assuming that the CCP can avert a revolution if/when the Chinese economy blows up, it appears that China should be in reasonably good shape since it will have actually created something of at least somewhat enduring value.

                    Sadly, that is more than I can say about the U.S. It appears to me that most of the new debt created as a result of QE and ZIRP has gone to rent-seeking activities. When things blow up here, I don't think we're going to look back 10 or 20 years ago and say, "Ignoring the financial blow out (let's say we write off all the debt), the U.S. is in noticeably better shape than it was back then."


                    • #11
                      Re: China Starts to Crack?

                      So much is on edge right now, I sense something BIG is about to happen...........
                      Can't shake the feeling Brexit will start the ball rolling.....


                      • #12
                        Re: China Starts to Crack?

               does Poland



                        • #13
                          Re: China Starts to Crack?

                          Meantime in Blighty



                          • #14
                            Re: China Starts to Crack?

                            "...From rural bank runs to surging consumer indebtedness and an unprecedented bond restructuring, mounting signs of financial stress in China are putting the nation’s policy makers to the test.

                            Xi Jinping’s government faces an increasingly difficult balancing act as it tries to support the world’s second-largest economy without encouraging moral hazard and reckless spending. While authorities have so far been reluctant to rescue troubled borrowers and ramp up stimulus, the costs of maintaining that stance are rising as defaults increase and China’s slowdown deepens.

                            Among China’s most vexing challenges is the deteriorating health of smaller lenders and regional state-owned companies, whose financial linkages risk triggering a downward spiral without support from Beijing. A landmark debt recast proposed this week by Tewoo Group, a state-owned commodities trader, has raised concerns about more financial turbulence in its home city of Tianjin..."

                            It's never "different this time". And no, the Chinese didn't create some miraculous new economic model under the absolute, perfect, error-free central control of the National People's Congress and the PBOC.

                            Chinese governments have been at the forefront of increasingly "reckless spending" for more than two decades. I have long argued on this forum the Chinese governments (with no small amount of help from multinational corporations, the global banks and LDC kleptocrats) were sponsoring the greatest misallocation of capital in history, that the massive capacity additions (exemplified by steel, cement, power plants and entire empty cities) were an absurdity and the so-called "Chinese Miracle" would eventually prove to be a chimera (along with such nonsensical constructs as BRICS). Is there anyone here that doesn't think the Belt and Road initiative is really to soak up all that otherwise useless processed materials and manufactured goods capacity China has installed?

                            I don't know if this time has now finally come, but it certainly seems the "cracks with Chinese characteristics" are finally becoming so visible we can no longer pretend they aren't meaningful in some way.

                            Perhaps Xi Jinping and his minions will pull another rabbit out of the hat and prolong the "miracle". But my sense is this SOE bond default is not a singular, isolated event, but the latest in the steadily accelerating global sovereign bond crisis (and yes, I know there is all sorts of commentary about how these are not sovereign bonds in the classical sense; but that is certainly how they were peddled, and there seems a rather thin line between the bonds of Chinese SOEs and those of the Chinese State).

                            The PIIGS (remember them?) might have been the early indicator of the onset of this inevitable sovereign debt problem - the ECB forcing interest rates on those bonds to represent a credit risk that is less than US Treasuries. Then came negative interest rates for the bonds of erstwhile top tier credits (Switzerland, Germany, etc). The present breathtakingly large Federal Reserve repo market liquidity injections (to support the moribund European banks, such as Deutche Bank?) is one more (this is not QE as we have heretofore known it; and has anyone noticed President Trump has recently gone silent wrt to pushing the Fed to lower short term rates?).

                            This below, now that it is official, would seem yet another disquieting sign:


                            Tewoo Offshore Bondholders Take Heavy Losses to Exit

                            Dec 13, 2019 05:00 AM

                            Bondholders in a defaulted Chinese state-owned enterprise chose to sell their holdings back to the company at heavy discounts to avoid possibly even bigger future losses.

                            Tewoo Group Co., the first state-owned company to miss a payment to foreign dollar bond investors in two decades, offered investors in its $1.25 billion of bonds two options: either swap the bonds for new debt at zero or lower interest rates or sell them back at heavy losses. Most investors chose to accept the haircut and exit.

                            “A long delay means many hitches, so investors want to run while they still can,” an investor close to Tewoo Group told Caixin.

                            Tewoo Group, wholly owned by the Tianjin government, is one of China’s top commodity traders and has been a Fortune Global 500 company since 2012.

                            Like many government-backed commodities traders, Tewoo took advantage of easy access to bank loans to provide financing for steel buyers or steelmakers, earning commissions on the deals.

                            This business model plunged Tewoo into debt trouble after Bohai Steel Group Co. Ltd., one of the steelmakers with which it had close business ties, fell into a debt crisis and collapsed. The company accumulated 256.5 billion yuan of total liabilities by the end of 2018, including $2.05 billion of offshore debt, according to people close to the Tianjin government.

                            Tewoo’s debt restructuring plan came before the Dec. 16 due date of a $300 million bond with a coupon rate of 4.5%, one of four notes covered by the plan. The bondholders can choose either to sell the bonds back at a discount price of $667.28 for a face amount of $1,000, or swap the bonds to new zero-interest bonds due in 2024, according to the plan disclosed by Tewoo.

                            So far, only 10% of investors chose to swap their debt, while 80% elected to sell back at a loss and 10% haven’t made a decision, Caixin learned from investors. For two other bonds due in 2020 and 2022, about 80% of investors chose sell back at discounts as deep as 47%.

                            The discount on $450 million of perpetual bonds with a coupon rate of 5.8% is even deeper at 64%. Investors can also choose to swap the bond for new debt due 2039 at a coupon rate of 1.6%. About 40% of holders of the perpetual bond chose the swap option because the sellback price is too low and some domestic institutional investors want to wait and see, some investors said.

                            Among the total $1.25 billion of bonds, only about $100 million were swapped for new debt, and $100 million of perpetual bonds were swapped, meaning the new bonds will have very limited liquidity, investors said...
                            Last edited by GRG55; 12-15-19, 04:18 PM.


                            • #15
                              Re: China Starts to Crack?

                              I see China just "Reminded" Germany that if Europe bands its IT equipment then it would have to "Look at the safety" of Germany cars..........

                              The Gloves are coming off