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By Tyler Durden

Back in October when we first looked at ground zero of the commodity price collapse, we found something striking: as of the end of 2014,

And since in the intervening time period, both commodity prices have dropped far lower, while Chinese corporate debt has proceeded to soar exponentially, we said it was “safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can’t even generate the cash to pay down the interest on their debt, let alone fund repayments.”

We concluded that “we fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.“

To be sure, the Chinese government has done everything in its power to delay this day of reckoning and mask just how extensive the devastation at the local level is, by focusing its entire recently concluded People’s Congress on the topic of sustainability and debt leverage, going so far as to propose a wholesale, and utterly mind-boggling, debt-for-equity exchange at the bank level, one which would involve the nationalization of China’s insolvent commodity enterprises. Alas, we along with most rational observers, are skeptical this plan would ever get off the ground, as it would mean encumbering banks not with secured if impaired loans, but with unsecured equity in still insolvent companies, in the process making China’s solvency problems even worse.

That said, the punditry has indeed started to focus away from macro China and to the “devastation at the corporate level”, most notably in a recent Reuters article which suggested that “China’s campaign to slim down its bloated industries could be derailed by more than $1.5 trillion of debt in its steel, coal, cement and non-ferrous metal sectors, which threatens to overwhelm local banks.“

The story is well known: China is providing more than 100 billion yuan ($15 billion) in the next two years to handle layoffs from coal and steel, but that will only be made available once debts have been settled. Critics say there is no clear mechanism for tackling the debt burden, which will put huge strain on the weakest sections of the banking sector.

The debt figures, revealed in papers submitted to China’s parliament this month, highlight the dilemma facing state firms grappling with surplus capacity and how difficult it will be to pull off this central plank of Beijing’s economic reform plans.

Costs for the estimated 1.3 million coal-sector layoffs alone are as much as 195 billion yuan, and coal industry delegates attending parliament urged government to provide more support to deal with the mounting debts of hundreds of stricken “zombie” firms.

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A lawyer who handles steel industry non-performing loans for mid-sized Chinese …read more

Source: Chairman Of Insolvent Chinese Steel Company Hangs Himself Day Before Bond Maturity

    

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Posted March 26th, 2016 in Uncategorized.