Cross-posted from Investing in Chinese Stocks.
I have been covering the ongoing defaults in the private bond market, now Bloomberg has picked up the story.
Tianjin Tianlian Binhai Composite Materials Co., which makes polymeric composite materials, couldn’t pay back principal and interest on its notes when investors exercised their option to sell back the securities July 28, Caixin Online reported July 31, without saying where it got the information. Tianjin Tianlian’s 50 million yuan of bonds are due on Jan. 29, 2015, according to China International Capital Corp. Three calls to the manufacturer went unanswered.
Huzhou Jintai Science and Technology Co. failed to repay the principal and interest on 30 million yuan of its debentures when investors tried to sell them back on July 10, according to a CICC report released on July 25. The report said Zheshang Securities Co., the notes’ lead underwriter, informed the Shanghai Stock Exchange on July 18. Two calls to Huzhou Jintai went unanswered.
A local court accepted an application for bankruptcy by Zhejiang Walters Polymer Technology Co. on March 12, according to a statement on Anji County People’s Court’s website. Investors could sell back 60 million yuan of the company’s bonds on July 23, according to CICC. An official who wouldn’t disclose her name declined to comment on the repayment status yesterday.
……“The government has a high tolerance for defaults in the private bond market because the investors are institutional investors who can tolerate higher risks than individuals,” Shanghai-based Li said. “The government can’t save every single company.”
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There are two points not covered in the Bloomberg article. Huzhou Jintai isn’t having operational difficulties. It has gone bust due to making credit guarantees for other companies that went bankrupt. For each of these bankruptcy cases, there could be several, a dozen, or dozens of firms involved.
As I have explained previoulsy, these credit markets are local but what looks like a small credit event is much larger than it appears. China’s credit risk is systematic, it spreads via mutual guarantees between companies. The risk is localized because local governments that may be having their own financial problems due to the slowdown in land sales, so bailouts are unlikely. It also means risk is hidden – companies with seemingly no risk may in fact be at great risk due to mutual guarantees.
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Meanwhile, there are more signs of easing around mortgages. The cancellation of buying restrictions had little effect on most markets, so cities are already following up with credit easing. Borrowers must make a larger down payment and generally pay higher interest rates for a mortgage on a second home, but Guangxi plans to ease these credit restrictions.
The article also mentions the bailout plan for Baotou, Inner Mongolia. From September 6 through 10, to coincide with a real estate expo, the city will subsidize the real estate deed tax. First time home buyers will receive a 100% subsidy. Second home buyers or buyers who won’t live in the home will get a subsidy of 50%. Buyers will also receive ￥2000 per home purchased.
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