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Sunday, March 09, 2014

Remember This When We Peak

 Shanghai Nights

That is, when the present re-inflation roller coaster of asset prices reaches its peak, and we look forward into the massive declivity we shall soon be riding down, screaming all the way.

China Gets 1st Onshore Bond Default as Chaori Doesn’t Pay 
 Mar 7, 2014 11:00 AM ET
China’s onshore bond market experienced its first default as a solar-cell maker failed to pay full interest on its bonds, signaling the government will back off its practice of bailing out companies with bad debt.

Shanghai Chaori Solar Energy Science & Technology Co. (002506) is trying to sell some of its overseas plants to raise money to repay the debt, Vice President Liu Tielong said in an interview yesterday at the company’s Shanghai headquarters. The company said March 4 it would only be able to pay 4 million yuan ($653,000) of an 89.8 million yuan coupon due yesterday.

The number of Chinese companies whose debt is double their equity has surged since the global financial crisis, suggesting this first onshore bond default won’t be the nation’s last. Publicly traded non-financial companies with debt-to-equity ratios exceeding 200 percent have jumped 57 percent since 2007. Chaori Solar may become China’s own “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp

“There will be more defaults in China’s onshore bond market,” said Qiu Xinhong, a bond fund manager in Guangzhou at Golden Eagle Asset Management Co., which oversees 13.9 billion yuan in assets. “The next default will be likely to happen in overcapacity industries, such as steel, nonferrous metals and coal. Bond investors will shun private companies with heavy debt burdens because they’re the most at risk.”...
 Chaori may be a "Bear Stearns" moment, and cause people to reassess risks in companies whose debt is double  - or more than double - their equity.

Do you think so? It will work itself out over the next few years, just as the Housing Bubble did, starting back in 2006. By 2008, it was a hurricane, even though it seemed to many of us to have come out of nowhere.


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