As we detailed previously, the first USD-denominated Chinese corporate bond default last week - of developer Kaisa Group - signals considerably deeper problems in Chinas economy as one manager noted, everyone is rethinking risk right now. As Bloomberg reports, Chinese companies comprised 62% of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion and that huge (and illiquid) market has been too complacent, according to one credit strategist who warned, investors would be “rational to adopt a cautious approach in view of the fact that anything can happen, anywhere, anytime. It would be irrational to continue thinking that after Kaisa none of the companies will see a similar fate. As Bloomberg reports, Kaisa’s woes began late last year when the government in Shenzhen, less than 25 kilometers (15.5 miles) from Hong Kong, blocked approvals of its property sales and new projects in the city. It’s also being probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen who was taken into custody as part of a graft probe, two people familiar with the matter said last week, asking not to be named because the connection hasn’t been made public. Kaisa missed an interest payment due Jan. 8 on its $500 million of 2020 bonds. The notes were sold to investors at par, or 100 cents on the dollar, in January 2013. In December, when some of Kaisa’s projects were blocked and key executives quit, the debentures lost 40.1 percent. They continued to fall in January, slumping to 29.901 cents on the dollar on Jan. 7. That may signal deeper risks for China’s already fragile and corruption-prone property market, which according to World Bank estimates accounts for about 16 percent of economic growth. Chinese companies comprised 62 percent of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion of the $392.5 billion total, according to data compiled by Bloomberg. BlackRock Inc., the world’s biggest asset manager, owned Kaisa’s 8.875 percent securities due 2018 and the ones the subject of the missed coupon payment, the 10.25 percent 2020s, its latest filing on Jan. 14 shows. Funds managed by JPMorgan Chase & Co., Fidelity Investment and ING Investment Management also held some of Kaisa’s debt at the end of October, according to filings. “The market has been too complacent,” said Raymond Chia, the Singapore-based head of Asia credit research at Schroder Investment Management Ltd., which had $447.7 billion under management as of Sept. 30. Investors would be “rational to adopt a cautious approach in view of the fact that anything can happen, anywhere, anytime. It would be irrational to continue thinking that after Kaisa none of the companies will see a similar fate.” Some of Kaisa’s Chinese creditors, meanwhile, have asked courts to freeze the company’s assets. In a statement on Jan. 9, the developer said that “several bank accounts of the group” had been frozen. ... It’s a reminder of the risks overseas bondholders face when Chinese companies run into trouble. China’s bankruptcy laws favor local creditors while offering fewer protections to foreign debt claims. Kaisa has a 30-day grace period to make its missed payment. A bigger concern for global investors may be the hurt inflicted on the property market by President Xi Jinping’s effort to uproot government corruption. Bribery scandals have rocked the sector in the past and the prospect other developers may be targeted has hit bond and share prices almost unanimously. “It’s definitely a concern among investors” that similar events could happen to other Chinese developers... “When sales are blocked at other developers, it fuels speculation of similar political risks,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. But fear is starting to spread through credit markets (even as Chinese stocks ignore fundamentals for now)... Concern is mounting that increasing financial stress among builders could spill over into a broader credit crisis in China. New-home prices fell in 65 of the 70 cities monitored in December and were unchanged in four, the National Bureau of Statistics said in a statement yesterday. Shenzhen recorded higher prices, the first city to see an increase in four months. Borrowing costs for many developers in the world’s second-largest economy have surged since Kaisa’s travails began. Yields on Chinese dollar-denominated speculative grade debt climbed to 12.38 percent on Jan. 16, a Bank of America Merrill Lynch index shows, the highest since June 2012. The junk debt has lost 5.7 percent in 2015, the worst start to a year on record. And no matter how you try and ignore it... Housing’s influence on China’s economy is pervasive, driving sales of everything from cement and steel to electrical appliances, furniture and cars. It’s contribution at home, and to global expansion, make it “the most important sector in the universe,” Jonathan Anderson, the former chief economist for emerging markets at UBS Group AG who now runs Beijing-based Emerging Advisors Group, wrote in a 2011 research note. Property is the main risk for China’s economy, Ma Jun, the chief economist at the People’s Bank of China, said in October. * * * Its pretty clear which market is complacent... Think about why (fundamentally) stocks are rallying - because everyone who can make their mark on a piece of paper believes China will fold, make the broad-based RRR cut they have said they will not and flood the world with credit again... so - riddle me this - why are the credit markets (that would directly benefit from said rate cut) not rallying?
Posted on: Thu, 22 Jan 2015 01:54:26 +0000