By Jeffrey P. Snider
There are certain compounds that just do not go together without creating volatile reactions. These binary substances, when mixed, are exceedingly dangerous under even stable conditions. It seems as if there is a lot to be said of the latest near miss in Chinese bond defaults.
Again, we are dealing with a relatively tiny business that should, on its own, be less noteworthy than the most mundane of investment information flow. With that in mind, a good deal of caution is called for in making interpretative extrapolations. This is all the more relevant in trying to analyze the great mystery that is China "market."
China's dollar problem seems to have reached its first lull, as copper prices have rebounded back toward $3.05 (though gold may have been sucked into the vortex, now back below $1,300) and the yuan shows stabilization (not PBOC, but a release in dollar bidding). I think it would be easy to interpret that as a signal that the Chinese dollar "market" is taking the news of Xuzhou Zhongsen Tonghao New Board Co. in stride.
While various outlets reported that the construction products manufacturer missed a coupon payment on March 28, the guarantor, Sino-Capital Guarantee Trust, has indicated it would honor commitments in some unexplained fashion. The amount of the bond issue (not the coupon payment) was, again, indeed small, totaling only CNY 180 million (approx. $29 million), but initially Sino-Capital appeared to harden its stance against honoring any obligation. According to the Global Times,
Xuzhou Zhongsen's bonds were guaranteed by Sino-Capital Guaranty Trust Co Ltd, but it declined to pay out, arguing that the guarantee had been issued by one of its local branch offices without head-office approval, the newspaper said.
In any financial market where "insurance" and guarantees are a good part of the business, that can't help but increase the level of skepticism about this new high yield market in China. Junk bonds of this type have only been "allowed" since mid-2012, so given this one instance it raises the idea of complications over how "ready" the market was to take on such scale.
Again, extrapolation being a dangerous game using only one small firm, that caution is somewhat mitigated as this story appears much deeper than this one potential instance of "that does not seem right." There is very little information to be had at this point, but what there is only adds more layers of confusion and uncertainty.
According to several sources, Xuzhou Zhongsen Tonghao New Board was acquired in a deal earlier this year. Asia Fashion Holdings of Singapore purchased the entire "share capital" of China Construction Material Hong Kong (CCMHK), an investment holding company. CCMHK owns Zhongzhuang Xuzhou Construction Material Co. and also "indirectly" owns Xuzhou Zhongsen Tonghao New Board - our default candidate. Other than that announcement made in early January, I can't find any record of the deal being consummated or withdrawn, only bland and opaque references to Xuzhou Zhongsen Tonghao being "closely held." Beyond that, Asia Fashion Holdings is something to behold.
According to the Business Times, Asia Fashion Holdings "had" to buy some other business to improve its financial performance or face being added to a "watch list" by the Singapore Exchange. The company just announced a massive loss after suffering a 60% drop in revenue in 2012 from what appears to be a dispute over "provisions of products" at its Chinese manufacturing subsidiary. There aren't any more details on the basis of the dispute.
On February 28, Asia Fashion Holdings issued the following statement about what looks like a follow-on IPO subscription:
The main reason for the repayment of the loans was due to the closure of the bank accounts with Industrial Bank Co., Ltd, Fuqing branch, whereupon the company was asked to repay the outstanding loans with the same bank. The monies remaining in the company's account in Industrial Bank Co., Ltd, Fuqing branch was transferred to Shanghai Pudong Development Bank and subsequently used by the company for working capital purposes.
Needless to say, this is beginning to look something like an intentional mystery, a tangled web of intricacy that leads to no place that can be fairly called reassuring. I should emphasize here that I have no position or opinion on any of the companies mentioned, I only seek to provide an informational transcription of what looks like a complicated and very unclear situation.
To reinforce all of that, the actual bonds that are now in some level of default, bailed out or not, were issued just last year.
So, to recap, we have no clear understanding of who owns the company coupled with a default on interest payments that is either the first or second coupon in the series. It's extremely rare to see any company default on bonds right out of the gate. That is the very definition of troubled finance and suggests more than a little too much apathy at floatation.
The larger and more important contention is whether this is emblematic or idiosyncratic. There is absolutely no way to tell at this point because information is both exceedingly scarce and partial at best. What it does recommend is much closer scrutiny to parse something meaningful beyond the obvious deceleration in the Chinese economy. That is the one unifying element here, as it probably won't take much time to get a sense of all this. The lack of Chinese growth is going to provide many more candidates for analysis in the future, meaning a better idea of how tangled and insecure the financial elements really are.
It is also difficult to remain unbiased toward these kinds of occurrences, particularly in this context. The rapid expansion of "money" breeds these very entanglements and peculiarities. Nobody seems to care when it all appears to be working because recency bias captures the mood - nothing bad has happened so nothing bad can happen. These small and minute defaults and irregularities thus obtain outsized importance in that process of revealing recency bias as they stand in direct contradiction of that prevailing consensus.