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This Evergrande Thing Is Serious

Merkin

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"It's A Disastrous Day" - All Hell Breaks Loose In China's Bond Markets​

BY TYLER DURDEN
TUESDAY, OCT 12, 2021 - 04:11 AM
The US bond market may be closed, but it was fully open in China, and locals took advantage of this fact to do one thing: sell.

In the aftermath of our viral post ""Catastrophic" Property Sales Mean China's Worst Case Scenario Is Now In Play", China property firms bonds were hit with another wrecking ball on Monday as Evergrande was set to miss its third round of (offshore) bond payments in as many weeks and rival Modern Land became the latest scrambling to delay deadlines.

Having already suffered the fastest drop on record, Chinese junk bond markets - where property developer issuers dominate - were routed once again as fears about fast-spreading contagion in the $5 trillion sector, which drives a sizable chunk of the Chinese economy, continued to savage sentiment. Meanwhile, China Evergrande Group's offshore bondholders still had not received interest payment by a Monday deadline Asia time, Reuters reported citing sources.

But while Evergrande's default is now just semantics, and one week after Fantasia shocked bondholders with a surprise announcement it too would stuff creditors just weeks after it had said its liquidity was fine, which sent its bond plunging from par to 74 cents in seconds...



... other signs of stress included smaller rival Modern Land asking investors to push back by three months a $250 million bond payment due on Oct. 25 in part "to avoid any potential payment default." This was not expected, and Modern Land's April 2023 bond plunged more than 50% to 30 cents on the day.



Elsewhere, Xinyuan Real Estate proposed paying just 5% of principal on a note due Oct. 15 and swapping that debt for bonds due 2023. Fitch Ratings called the move a distressed debt exchange while downgrading the firm to C. At least the two companies are relatively small: Modern Land and Xinyuan have $1.35 billion and $760 million of dollar bonds outstanding, respectively, according to data compiled by Bloomberg. In comparison, Evergrande has $19.2 billion.

Among the declines for high-yield issuers, China Aoyuan Group’s 6.35% note due 2024 dropped 13.2 cents on the dollar to 57.5 cents; Sunac's 6.5% dollar bond due 2026 declined 9.4 cents to 57.9 cents, leaving both poised to close at the lowest-ever levels.

Kaisa Group, which was the first Chinese property developer to default back in 2015, also saw some of its bonds slump to less than half their face value while supposedly "safe" names such as R&F Properties, and Greenland Holdings, which both have prestige projects in global cities like London, were also widely sold.

Yields on Chinese junk-rated dollar bonds surged 291 basis points to 17.54% last week, the highest level in about a decade, according to a Bloomberg index.



And just to add insult to injury, China's10-year government bond futures declined to a three-month low as the central bank’s latest liquidity draining weakened expectations of fresh monetary policy easing. Futures contracts on 10-year notes fall 0.4% to 99.14, the lowest level since July 12. 10-year sovereign bond yields rose 5bps, the biggest gains in two months, to 2.96%.

"It's a disastrous day,"
Clarence Tam, fixed income PM at Avenue Asset Management in Hong Kong, told Reuters, highlighting how even some supposedly safer "investment grade" firms had now seen 20% wiped off their bonds. "We think it's driven by global fund outflow .... Fundamentally, we are worried the mortgage management onshore hits the developers' cash flow hard," he added, referring to concerns people could stop putting deposits down on new homes.

In other words, the dynamic we discussed over the weekend in which we explained why "China's Worst Case Scenario Is Now In Play" is spreading from the biggest rotten apples - i.e., Evergrande, Fantasia - to collapsing confidence in the property sector, to credits that until now were seen as healthy and immune from a property implosion. In short, the bursting of the US housing bubble has moved to China, and yes - that culminated with the original Lehman moment.

Meanwhile, JPMorgan analysts highlighted how international investors were now demanding the highest ever premium to buy or hold 'junk'-rated Chinese debt. There is now a whopping 1,200 basis point difference between the bank's closely-followed JACI China high yield index and a similar index of investment grade AA-rated local Chinese market bonds, known as "onshore" bonds. The option-adjusted spread on the ICE BofA Asian Dollar High Yield Corporate China Issuers Index (.MERACYC) is also at its widest ever.

"Evergrande's contagion risk is now spreading across other issuers and sectors," JPMorgan's analysts said, demonstrating a rare talent for observing the obvious.

And while today may have been "disastrous" it could get far, far worse if the market loses faith that Beijing will bail out the bond market.
"We believe policymakers have zero tolerance for systemic risk to emerge and are aiming to maintain a stable property market, and policy support could be forthcoming if the deterioration in property activity levels worsen," said Goldman head of Asia Credit Kenneth Ho.

Overnight we saw the first sign of such an implicit support in Harbin, the capital of northeastern Heilongjiang province, which became one of the first cities in China to announce measures to support property developers and their projects. According to a report on a website run by Harbin Daily, the city will offer as much as 100,000 yuan home-purchase subsidy to “talents” that meet certain requirements. The city would also make more existing homes eligible for housing provident fund loans to buyers; the moves are aimed at promoting stable and healthy development of the city’s property market, according to the document.

The cash-strapped property developer's troubles and contagion worries have sent shockwaves across global markets and the firm has already missed payments on dollar bonds, worth a combined $131 million, that were due on Sept. 23 and Sept. 29.

While China's property sector turmoil has so far been contained to the bond market, tensions amid offshore bonds could soon create headaches for the country’s equity traders, according to Gilbert Wong, head of Asia quantitative research at Morgan Stanley. High-yield credit spreads over comparable Treasuries are the widest on record -- at about 1,866 basis points on an option-adjusted basis, data compiled by Bloomberg as of Friday show. But a measure of stock volatility has actually fallen so far this month.



Still, the pair has shown a close relationship in recent years, which suggests their divergence may not last. In the end, a crash in the stock market, where hundreds of millions of Chinese residents are invested, may be just the kick Beijing needs to wake it out of its no bailout stupor.

I have to wonder how much of this can be attributed to the Fed?
 

Casey Jones

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It's a bubble - a planned economy with a veneer of the Free Market.

This is what comes of a collectivist government, which rejects the Free Market, trying to run a Potemkin Free Market. You have MASSIVE malinvestment and a belief that if things go wrong, the controllers, the planners, will bail things out.

Which they could do, but only if it furthers THEIR aims. Which are entirely different from those of investors, buyers, persons who paid for property expecting completion.
 

hardmoney

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Maybe the reason they have been doubling down on Gold acquisitions the past several years is so they could weather a storm like this. And just sit back and watch it blow a path of destruction around the world.
 

anywoundedduck

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The elephant in the room is the total collapse of property values in Silicon Valley as all the Chinese Nationals sell off just to survive the onslaught, as their investments in China sink at a rapid rate.
 

Zed

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The elephant in the room is the total collapse of property values in Silicon Valley as all the Chinese Nationals sell off just to survive the onslaught, as their investments in China sink at a rapid rate.

The individual investors have been told by the CCP that they will be made whole as will all the suppliers. It's clear that the ones that will not be bailed out are the leveraged speculators. Stock holders, bond holders and the company itself is on it's own. The CCP are sending a message.
 

anywoundedduck

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The individual investors have been told by the CCP that they will be made whole as will all the suppliers. It's clear that the ones that will not be bailed out are the leveraged speculators. Stock holders, bond holders and the company itself is on it's own. The CCP are sending a message.
But I thought I read that China was broke as well, or do they just print to pay their debts? Like us.
 

chieftain

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Pro tip, they're all broke.
 

gnome

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Twenty years of declining RE prices... which bubble replaced the RE one, govco borrowing?
Yen carry trade? not sure, really

also, it's THIRTY years

https://www.reuters.com/world/asia-...-while-longer-boj-baulks-tapering-2021-06-04/Analysis: Japan's yen set to suffer a while longer as BOJ baulks at taperingBy Kevin Buckland and Hideyuki Sano5 minute read
TOKYO, June 4 (Reuters) - The developed world's most dovish central bank and companies keen to put cash to work overseas have combined to make Japan's yen one of the world's worst performers this year, and that weakness could linger a while.
Factors at home and abroad have conspired to drive a 6% slide in the yen against the U.S. dollar this year.
Unlike other major central banks that are starting to face inflation risks and contemplating a withdrawal of emergency pandemic stimulus, the Bank of Japan has not only been grappling with deflation but has been notably loath to publicly suggest any tapering. read more
Japan has also been slower than most countries in getting its population vaccinated for COVID-19 and returning to normalcy. Its economy is shrinking and the absence of foreign tourists could mean no real boost from the delayed Tokyo 2020 Olympics this summer.read more



"I think the yen is going to be the one that really struggles as the global economy picks up," said Joseph Capurso, head of international economics at Commonwealth Bank of Australia.
While a recovery could undermine the dollar, which traditionally moves counter to economic cycles, the yen has even stronger safe-haven credentials and is likely to underperform, he said, projecting the yen at 116 in a year's time compared with the current 110.
Indeed, as investors bet on economic recoveries in Europe and the United States, buoying global equities and bond yields as well as the dollar, the yen's status as a cheap and safe funding currency has been reinforced.
"The carry trade is very much in vogue right now, and that doesn’t bode well for yen," said Bart Wakabayashi, Tokyo branch manager of State Street Bank and Trust.


"I don’t know what the story would really be to strengthen the yen right now."
In late March, as 10-year U.S. Treasury yields -- which the Japanese currency has a close, inverse relation to -- hit one-year highs above 1.77%, the yen hit a one-year low of 110.97 per dollar.
But even after U.S. yields retreated below 1.6% as the Federal Reserve pushed back against speculation for an early taper of its asset-purchase programme, the yen didn't budge much.
Some of that weakness can be explained by a sudden burst of overseas acquisitions by cash-rich Japanese companies.



Data from mergers and acquisitions (M&A) advisory firm Recof show there were 210 foreign acquisitions by Japanese companies during the first four months of 2021 worth 3.71 trillion yen ($33.64 billion), triple the total value a year earlier.
"Interest rates are one important factor influencing FX rates, but not the only factor," said Citigroup's Tokyo-based chief currency strategist Osamu Takashima. "M&A-related flows are pushing the yen down against the dollar."
HOW CHEAP?
The yen's divergence from U.S. yields, and its persistent weakness through April even as the dollar fell broadly, has market participants disagreeing on its outlook.

"The divergence in monetary policy can explain some degree of yen weakness, but not this level," said Tohru Sasaki, JPMorgan's Tokyo-based head of Japan market research. Sasaki says the one-time nature of the M&A outflows combined with the yen's dislocation from fundamentals should argue for a recovery to 105 or 106 levels.
On a trade-weighted basis, the nominal yen index has lost 6.2% so far this year to a level last seen in 2018. A large part of that is on account of a surge in the Chinese yuan, which comprises a third of the basket, more than the U.S. and European currencies combined.
"The yen looks both stuck and cheap," Societe Generale's global head of FX strategy, Kit Juckes, said in a research note, adding it was "waiting only for some better news on Covid and economic reopening to spread its wings."
Meanwhile, hedge funds and other speculators have been piling on bets against the yen. Data from the U.S. Commodity Futures Trading Commission shows a steep climb to the biggest net short yen position in almost two years in late April .

For others, such as Bank of America's head of Japan FX and rates strategy, Shusuke Yamada, the possibility that the Fed signals some form of monetary tightening and the continued rise in equities imply more yen weakness. Yamada reckons the yen could go as far as 115 per dollar, and end the year at 113.
"BOJ will be the laggard, and probably the biggest laggard, so I think that’s in investors' minds," he said.
($1 = 110.2800 yen)
 
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gnome

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gnome

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Could hit commodity prices