Ever since the specter of the first real domestic default on a Chinese corporate bond hovered over the markets, the Chinese credit markets have been leaking lower. The last 3 days have seen the biggest drop in Chinese credit markets in almost 4 months. That situation, wistfully occurring half way around the world while US equity markets press on to ever more exuberant (and ignorant) heights, meant at least 3 other Chinese firms pulled their bond issues today and, as Reuters reports, has "triggered widespread upheaval in the bond market." Banks are awash with liquidity (as indicated by low repo rates) but clearly unwilling to lend and external investors are now running scared.
The Chinese corporate bond market has suffered considerably in the last few days…
Even as repo rates have dropped (and CNY has strengthened) – repo rates at multi-month lows, CNY strengthening and stocks weak…
and SHIBOR at multi-month lows (suggesting plenty of liqudity at the banks but as we see below, a clear unwillingness to lend)…
And that has led to pulled issues…
The threat of China's first domestic bond default has prompted Suining Chuanzhong Economic Technology Development to delay a one billion yuan ($164 million) debt issue and two other companies have halted deals blaming market volatility.
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The run-up in corporate debt since 2008, and overcapacity in sectors such as steel, coal and solar energy, have threatened the solvency of many borrowers.
Chuanzhong said late on Wednesday that the news that Chaori Solar was set to miss a coupon payment on Friday "triggered severe upheaval in the bond market", so it had delayed its bond deal.
Taizhou Kouan Shipbuilding postponed a 300 million yuan issue of short-term commercial paper, while Xining Special Steel cancelled a 470 million yuan offering of medium-term notes, the companies said.
The deals are relatively small, but the delays underline the risk that an unprecedented default will make it harder for other companies to access capital.
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Yields on corporate and enterprise bonds pushed higher after Chaori Solar's announcement. Five-year AA rated notes rose 8 basis points to 7.77 percent, the biggest increase since November 15, ChinaBond data showed.
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This situation is being exacerbated as the lending is being cut to the indistries with the most slack – with the result (as we warned about in the past) that commodity-based collateral for all the shadow loans is getting hammered (through no real demand) and crushing the credit system (through haircuts and forced deleveraging as collateral values collapse)…
This is very negative for the Chinese economy which now more than ever is reliant on credit as its growth-driver… and the China credit-crisis indicator remains flashing red (2Y Swap – 2Y Bond spread)…
Charts: Bloomberg
via Zero Hedge http://ift.tt/1lDCbKC Tyler Durden