Tuesday, June 01, 2010

All Look Same (to me)

You get a certain sense of Déjà vu as to how the China tightening is playing out. Bloomberg is relatively quick out of the gates on the slide in Asian High yield. Chinese credit tightening is generally well under way or at least flagged by the time that Chinese property companies come to borrow money offshore since they borrow a lot cheaper onshore. Why borrow at 12-20% offshore...
...when you can borrow onshore at these rates (see chart below)? There is no clearer indication of China tightening being “real” than these companies borrowing offshore. Junkies don’t borrow from loan sharks because they are spoilt for choice ya know...

To put it into context, the last time Chinese developers (chart below - brown & green lines) were hitting the market hard with a lot of new issuance, Asian High Yield (white line) got drilled (OK, a good bit of that was the Subprime crisis, but you get the idea...). This may seem nuts to non-Asian observers but once you take into account that 1) Asian business owners seldom want to have less than a 51% stake for fear of having to actually care about corporate governance/being taken over etc and 2) all their onshore loans are short duration, so it makes a bit more sense paying 18% for five year money.
Needless to say, provided we aren’t facing the imminent financial collapse of 2008, spreads shouldn’t blow out that much but the picture is not pretty regardless. A number of deals were restructured over this time and the equities haven’t really come back.

Taking the corporate credit and equities hat off for a second it’s this chart that presents the most yogi bear opportunities. Chinese real rates (white, inverse scale), land transaction prices (yellow) and spot iron ore (red). All look same to me.

Doing a little bit more digging one finds that China accounts for 70% (!!!) of the seaborne iron ore trade and about 40% of its aluminum goes into construction. While the likes of Fortescue, Vale, Maanshan and most of the ASX have taken a beating on the back of super taxes and the like the iron ore market just doesn’t seem to quite get it just yet as the 12 month iron or swap level below indicates.
And when you place it next to other industrial metals it looks particularly out of place especially compared to zinc, the underperformer of the bunch in green that has about 40-55% of its demand coming from galvanized steel, coincidentally used for the most part in construction and outdoor applications.

Finally, Germany's record-breaking 246-point win at the Eurovision song contest may go down in history as the World's largest ever bribe: EUR 115bn and counting...

6 comments:

cpmppi said...

Hello all,
We can't seem to figure out how to get the charts to link to a bigger picture. For some reason despite having the same settings/following the same process as MM, blogger.com won't behave!

So this is an appeal to the more technically-minded... can anyone help?

Cheers,
cpmppi

Marshall said...

Don't blame me, I voted for Greece. Afterall, it really had the most eurovisonawesomeness.

cpmppi said...

It just isn't the same without Woggers...

Biofa said...

Hi, i've seen the two issues, but China Vanke is bank guaranteed AAA, has this any meaning??
So chinese people not only is building an real estate bubble, are they also financing it?? Double whammy?

coming back in Europe, this morning we're experiencing a simil-collapse in Spanish/italian govt bond market, the we had a strong comeback.. i think about a ECB intervention, any insight about it???

Nemo Incognito said...

Ok - that was largely my rambling so here's the Chinese bond market 101: most stuff is govvie, quasi govvie or state owned. China ratings are more or less meaningless - if your bond deal gets done you have the blessings of the central government, therefore you are more or less money good. The key thing they do is ration how much and who gets to issue. If you're a developer your construction loans onshore are at PBOC bills + a couple of hundred bps as in other countries but there's a lot of cashflow sweeping, final maturity type stuff. As such, your debt is pretty short dated. When these loans get withdrawn the strain on cashflows at a property company can get very brutal very fast since term loans and the like are never there when you need them. Hence, paying an equity like return offshore.

Biofa said...

@Nemo, ok thanks a lot for your chinese bond mkt for dummies!
very interesting!!