2015-10-18

Steel Debt Nightmare A Mirror of China's Economy

When is a default not a default? When the government tells you not to demand repayment.

Bloomberg: Chinese Firms Seen Dodging Defaults in Coming Days in Turnaround
A Chinese sausage maker is set to avoid a default in a turnaround, and the authorities were said to have stepped in to help a state-owned steel trader facing a bond deadline next week.

The National Development and Reform Commission will hold a meeting with investors in government-controlled Sinosteel Co.’s 2 billion yuan ($315 million) of 2017 securities who have an option to sell them back on Oct. 20., people familiar with the matter said. The NDRC will ask them not to do so, according to one of the people. Parent Sinosteel Corp. sent a letter to noteholders pleading with them to not sell the bonds back as Sinosteel would be unable to repay, the people said.
FT also has coverage here: Sinosteel bond investors hope for bailout as default looms
“The company has lost debt repayment ability. It can only rely on external support,” Jiang Chao, Haitong Securities bond analyst, wrote last week.

The Economic Observer says these cases are a mirror image of China's whole economy, with the northeast provinces exposed to steel also unable to repay debt:
Moreover, in some cities in Heilongjiang Province, such as steel shares as payment crisis has also begun hidden gradually taken shape. By the end of September, the National Development and Reform Commission inspectors do after the end of the inspection, the Heilongjiang Provincial Development and Reform Commission of cities in the province to carry out supervision of corporate bond debt, and they found that, although the majority of cities actively taking measures to ensure repayment of principal and interest. But "there are some counties due to changes in the economic environment, there are some difficulties in debt repayment schedule."

...China's economy is indeed in some of the less noticeable changes occur, such as strong, to enhance the proportion of the service sector, stable employment, and the new format and a new model emerging consumption. According to estimates, the first half of this year, China's economic troika, the contribution of consumption to GDP exceeds 60% by the end of this year, the service sector accounted for in GDP is likely to exceed 50%. Has been trying to get rid of the old model for the Chinese economy, these are monumental changes.

But for the purposes of decision-making has been, now difficult is "weakening the kinetic energy of the old economic downturn has increased the pressure", and even a little old kinetic energy of weakening fast, China's economy needs to be more precise on the mark, but also more complex The control means.
The article closes with a very mixed message.
NDRC officials said the steady growth in China's arsenal, there are many tools to choose from. For example, more investment project reserves, more investment fields. This is to increase the momentum of China's economy, but also for the transformation and upgrading of traditional industries, capacity clearing and reduce leverage, provide more time and space. He said, "Sometimes we have to deleverage, appropriate increase leverage."

...On the same day, at the end of the government after two billion yuan, "10 steel debt" emergency consultations on behalf of China's new economy Alibaba announced that it will more than 4.5 billion US dollars of funds to purchase Youku Tudou.

October 20, "10 steel debt" investors will be officially signed and the final decision; Ali and Youku Tudou investors will start each new picture, the National Bureau of Statistics will release since 2015's most looked down upon first-quarter economic data.

China's switch from old to new economy is accelerating.
I place far more weight on the debt at Sinosteel, in the short-run of the next year or two, than Alibaba's buyout of Youku, which looks more like tanking advantage of beaten down stock prices. When Sinosteel goes bust and Alibaba buys it, then I'll believe the switch from old to new is accelerating because it seems the only way this shift is going to happen is from the collapse of the old economy, not the growth of the new.

EO: 中国经济镜像:中钢债之危

Related from last year: Steel Trade Lawsuits Explode; Banks' Unceasing Nightmare; Defendants Flee

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