SinoInsight 1
According to mainland media reports, over the counter local government bonds have become very popular among investors, and are being sold at below the par value of 100 yuan as of April 17. Beijing five-year local bonds, which became available over-the-counter on April 1, are being traded at 98.53 yuan.
From March 25, commercial banks in Zhejiang, Shandong, Shaanxi, Sichuan, Beijing, and Ningbo started selling the first batch local bonds over the counter. According to news reports, the banks made 6.8 billion yuan in over-the-counter sales in early April.
OUR TAKE
1. In our April 8 analysis, we wrote that the CCP is making local bonds available over the counter to alleviate government financial difficulties and a financial crisis by transferring debt risks to the public.
The current trend of over-the-counter bonds being traded at below par value puts our prediction in our China 2019 outlook on track to being verified: “The central government may order more infrastructure projects, but will find it tough selling bonds to fund the projects.”
2. Typically, stock and bond prices move tend to move in the opposite direction. However, we believe that the falling prices for over-the-counter local bonds have little to do with the stock market situation.
First, the falling over-the-counter local bond prices come as China’s technical “bull” market is seeing reversals after about two months of gains. Second, financial institutions are operating in a very liquid environment given the central banks record cash injections in recent months. Third, over-the-counter local bonds are meant for individual and small and medium-sized institutional investors, and not the large financial institutions.
3. We believe that it is not a good sign that the par value of over-the-counter local bonds has fallen so quickly after the instruments became available. The commercial banks may find it harder to sell subsequent batches of local bonds.
SinoInsight 2
On April 18, mainland media reported that China Minsheng Bank had applied for a ruling from the Beijing Municipal High Court to freeze 400 million yuan worth of assets owned by CITIC Guoan Group (a subsidiary of CITIC Group). On the same day, mainland newspaper The Time Weekly reported that CITIC Group had sent a letter to the China Banking and Insurance Regulatory Commission requesting help in suspending efforts to collect debts from CITIC Guoan and allow the company to undergo debt restructuring.
Minsheng Bank’s court application is the latest in a series of debt-related lawsuits facing CITIC Guoan. As of March 15, Chinese courts have frozen 17.17 billion yuan worth of CITIC Guoan assets.
As of the end of January, CITIC Guoan has accumulated 155.8 billion yuan worth of interest-bearing debt, including 82.4 billion yuan in bank loans and 12.5 billion yuan in insurance company loans. CITIC Guoan also owes billions or tens of billions to securities companies, trust companies, and various other creditors.
OUR TAKE
1. CITIC Guoan’s debt troubles is a symptom of China’s debt crisis. Over the past decade, many large financial institutions expanded rapidly after taking on huge debts and when highly leveraged. The combination of excessive debt, excessive expansion, investment failures, and lack of credit channels results in a crisis situation for these financial institutions.
2. Last year, the “too big to fail” HNA Group faced similar debt problems. CITIC Guoan running into trouble indicates that the debt crisis is being triggered in China’s financial institutions, and could be growing more severe.
In our China 2019 outlook, we wrote that “some financial institutions may go bankrupt.” Current trends are moving in the direction of our prediction.
3. China’s economic fundamentals are weak and the central authorities’ stimulus measures are akin to applying band-aids. Thus, we remain pessimistic about China’s economic prospects despite seemingly healthy first quarter data and the good odds of a Sino-U.S. trade deal being reached.
With China’s debt crisis growing more serious, the CCP regime faces increased odds of Black Swan events this year.
