Tuesday, January 28, 2014

China Today!

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Beijing air pollution reaches crisis levels; can China survive its toxic environment?
by: Thomas Henry
Tuesday, January 28, 2014 http://www.naturalnews.com/043682_air_pollution_China_toxic_environment.html
(NaturalNews) China is the world's worst industrial polluter, spewing tons of toxins derived from man-made production into the air, soil and water at a steady rate. It has refused to comply with the same standards adopted by other leading nations of the world.
And the level of pollutants is starting to catch up with China's residents, who have to breath it. Recent weeks have seen declarations of "extremely dangerous pollution" in Beijing, with particulate matter reaching more than two dozen times the level considered safe for airborne toxins.

Workers and commuters commonly wear face masks to combat the often pungent odors and dust, while many suffer from chronic coughs and irritation in their airways and nasal passages.
The smog has reportedly worsened in the last couple of years, obscuring the skyline in major cities and severely limiting visibility. This toxins further compound in the winter with the heavy use of coal for heating and the often stale air.
While the World Health Organization (WHO) considers fine particles (PM2.5) safe below 25 micrograms, Beijing monitoring stations have recently recorded levels between 350-500 micrograms and as high as 671 micrograms. In Harbin, the tenth most populous city in China, which is located in the far northeast of the country, PM2.5 levels soared as high as 1,000 micrograms.
A Harvard study published in 2013 found that China's refusal to curb air pollution was contributing to shorter lifespans among its population, particularly in the north, including Beijing. The almost absurd levels of total suspended particulates just from using coal to heat homes has shaved off a calculated 2.5 
billion years of life expectancy for the 500 million residents of northern China, depriving individuals of an estimated 5.5 years of life.
Outsourcing blowback: Chinese air pollution drifts to the U.S.

Conventional wisdom has touted that outsourcing the manufacture of cheap goods to China and other sources of cheap labor would hold the added benefit of cutting down on pollution in the United States (with fewer at work in American factories). But that, too, has bitten back.
A fresh study conducted by the University of Washington found that smog and other airborne pollution from Chinese factories was creeping back to the U.S., along with infinite tons of imported goods. A full 21% of China's industrial pollution comes from manufacturing exports for the United States, bringing to full circle a new form of literal blowback.
The study's authors wrote, "Outsourcing production to China does not always relieve consumers in the United States - or, for that matter, many countries in the Northern Hemisphere - from the environmental impacts of
air pollution."
The levels of pollution from China are so high that the air pollution reaches the United States within six days, adding significant pollution to the West Coast, which has been registered by the EPA.
The study found, "On a daily basis, the export-related Chinese pollution contributed, at a maximum, 12-24% of sulfate concentrations over the western United States."
Heavy metal contamination in foods from China

Outsourcing also means that a great deal of the food consumed in America is produced in China - where the pollution also includes high levels of heavy metals. Currently, China ranks as the third largest source of imported food in the United States, though even the FDA is unsettled enough to turn away hundreds of batches of contaminated food each year.
Everything from packaged meals and canned
food to USDA-certified Organic produce ships to the U.S. in massive quantities on a regular basis. Previous exposes by Natural News and throughout the media have shown how much of this food is produced with standards considered unacceptable here in the States, and that the most populous country is also turning out some of the most contaminated foods in the world, frequently tainted with toxins including lead, cadmium, mercury, arsenic and even uranium.
In December 2013 - after a 2006-2009 soil survey was finally made public - the deputy minister of China's Ministry of Land and Resources declared that some 3.3 million hectares of farmland in central China was so polluted with heavy metals and industrial contamination that it could not be used to grow crops anymore. Cadmium was the chief concern for soil pollution. Additionally, some 60% of the groundwater used for drinking in Chinese cities is considered "dangerously polluted" with heavy metals, while the Asian country is notorious for its severely polluted rivers filled with industrial waste.
And again, all of this trickles back to the United States on a continuous basis.
Natural News and the Consumer Wellness Center have been running tests for heavy metal content in many popular food sources (particular to lot numbers). Check out some of the results (visit site here:
http://labs.naturalnews.com) for a better understanding of what's really in your food and what kind of heavy metal burden your diet could be placing on your body.
The scientific literature already raises alarm over Chinese-produced foods. Just one study from 2011 published in the Journal of the Science of Food and Agriculture on wheat grown in northwest China found very high levels of cadmium and lead, demonstrating, according to the authors, that food remains "an important avenue for toxic metals entering the human food chain."
Beyond just China's melamine infant formula scandal, an electrothermal atomic absorption analysis conducted by the University of Valencia found that all 29 commercially available infant cereals it tested were contaminated with both cadmium and lead, creating a chronic toxicity issue from foreign-produced foods.
Sources for this article include:
http://hosted.ap.org
http://www.pnas.org
http://rt.com
http://www.pnas.org
http://labs.naturalnews.com
http://www.naturalnews.com
http://www.ncbi.nlm.nih.gov
http://www.ncbi.nlm.nih.gov
http://www.danwei.com
http://science.naturalnews.com
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A poster girl for torture in Hong Kong By Kent Ewing
28 January 2014
HONG KONG - "Welcome to Asia's world city." That was the greeting Hong Kong's tourism board extended to the more than 50 million foreign visitors who came to the city last year to wine, dine, shop and enjoy the bright lights and sky-scraping architecture of one of the most vibrant, pulsating places on the planet.
For the 312,000 foreign domestic workers employed in Hong Kong, however, a more accurate salutation might be: "Welcome to Asia's third-world city." For them, life is defined by cramped quarters, low wages and, far too often, exploitation and abuse.
And now they have a grotesque poster girl for their plight: 23-year-old Erwiana Sulistyaningsih, an Indonesian maid now languishing in a hospital in her native country after allegedly suffering repeated incidents of torture at the hands of her Hong Kong employer. The Hong Kong government also faces pressure from Indonesia over the maid's alleged treatment.
The horrid details of her case - laid out by Prosecutor Catherine Ko Po-chui in a Hong Kong courtroom last week - have shocked and embarrassed this city of 7.1 million people and also prompted thousands of foreign domestic workers to take to the streets with demands for better protection from the Hong Kong government and the employment agencies that recruit and place them.
An overwhelming majority of these workers are young women. About half of them are Indonesians who, together with workers from the Philippines, account for 98% of the foreign domestic help in Hong Kong.
According to the prosecutor, Erwiana's former employer, Law Wan-tung, 44, assaulted her with a mop, vacuum cleaner tube, hanger and ruler. In addition, Law allegedly banged the maid's head against a wall.
The attacks, Ko told the court, left Erwiana with a fractured nose, broken jaw, chipped teeth and swelling of the brain, among other injuries. She had been working in Hong Kong for eight months before her return to Indonesia earlier this month.
After Erwiana's case came to light, two other Indonesian maids who had worked for Law stepped forward with similar claims.
Law, reportedly a former beautician, was arrested on January 19 at Hong Kong International Airport as she attempted to board a flight to Thailand and now faces seven charges for her alleged abuse of the three maids: one count of causing grievous bodily harm with intent, one of assault causing bodily harm, one of common assault and four counts of criminal intimidation.
Law, who has not yet entered a plea, was released by a Hong Kong district court last Wednesday on bail of HK$1 million (US$128,900). The case was adjourned to March 25 and may be transferred to a higher court.
A team of four Hong Kong police officers was dispatched to the hospital in Sragen, Central Java, where Erwiana is convalescing, to take a statement from her. It is not clear whether she will return to Hong Kong to testify.
It is clear, however, that, after initially turning a blind eye to Erwiana's case, the Hong Kong police and government are now treating it as a priority, with Chief Executive Leung Chun-ying saying he is "highly concerned at the case as Hong Kong is a lawful society", adding: "Our laws do not allow anyone to impose violence or torture anyone's body and mind."
Secretary for Labor and Welfare Matthew Cheung Kin-chung promised that authorities would vigorously pursue the case, stating that the agency that employed Erwiana, Chan's Asia Recruitment Center, may also face charges.
The case has been taken up by Indonesian President Susilo Bambang Yudhoyono, who reportedly spoke to Erwiana and her father on the phone. "Believe me, the law will be enforced, justice will be served; what's important is we will help with [your] treatment," he told the maid.
He told her father he had raised the case with Hong Kong's leaders. "I am sad and concerned that your daughter has suffered this tragedy. I am also angry at those who have committed this evil," he told Erwiana's father.
While such official pledges will no doubt be welcome news to Erwiana and her fellow domestic helpers in Hong Kong, the fact is that city officials were shamed into recognition of her case and, although they are belatedly vowing to punish her alleged torturer, they have shown no signs of changing an employment system that is inherently exploitative and invites the very abuse that they now affirm will be redressed.
As photos of a grotesquely battered and bruised Erwiana went viral, people all over the world had to wonder why Hong Kong authorities didn't even bother to question her when she hobbled through immigration to board a flight back to Indonesia, reportedly having been told to go home as she was no longer fit to work.
And when first asked about the case by the media, Hong Kong police said they had no reason to act as no charges had been filed. Obviously, now that the case has gained international attention, that mindset has changed.
But the change in official attitude may have come too late for the city to avoid a lawsuit. Human rights lawyers are urging Erwiana and her family to sue the Hong Kong government, maintaining that authorities failed in their obligation under Article 3 of the city's 1997 Bill of Rights Ordinance to protect her from "cruel, inhuman or degrading treatment or punishment".
If Erwiana's father, Rohmad Suputra, visiting his daughter in hospital last week, described her as being a picture of good health when she departed for Hong Kong last May but said of her return to Indonesia: "I was shocked and very sad. She looked like a skeleton with bad injuries when she came home."
Erwiana's doctor, Iman Fadhli, has said the swelling of her brain is preventing her from walking.
The sensational nature of Erwiana's ordeal has attracted the attention of human rights lawyer Robert Tibbo, who advised whistleblower Edward Snowden during his month-long sojourn in Hong Kong last year. Tibbo maintains that Erwiana could sue the city for failing to fulfill its legal commitment to provide protection to victims of torture, citing the indifference to the serious nature of her injuries shown by immigration officers at the airport.
Mostly lost in reports of the lurid details of Erwiana's treatment, however, is a long-needed rethink of the employment system for foreign domestic workers in Hong Kong.
The injuries sustained by Erwiana may be among the worst to come to light in Hong Kong, but hers is not an isolated case. One in five foreign domestic workers in the city reports being physically abused, according to a recent survey by Mission for Migrant Workers - and, of course, verbal and psychological abuse is far higher.
A report issued by Amnesty International in November found that domestic helpers in Hong Kong are subject to widespread abuse, including physical violence, rape, inadequate provision of food and long working hours.
Earlier this month, a Chinese University professor was arrested for allegedly assaulting her 50-year-old maid, and in September a couple were imprisoned for beating their Indonesian helper with a bicycle chain, wounding her with a paper cutter and scalding her with a hot iron.
Appalling incidents of this nature are likely to persist if the government does nothing to change a system that requires foreign domestic workers to live with their employers, forces them to return to their home country if they have not found another job within two weeks of termination of employment, and allows employment agencies to charge preposterously high placement fees that keep workers perennially in debt and thus tied to any employer, no matter how abusive, they can find.
Because space is at a premium in Hong Kong apartments, the live-in requirement means that 30% of domestic workers do not have a room of their own but must sleep in kitchens, closets, bathrooms or hallways - again, according to Mission for Migrant Workers. That alone is arguably a form of abuse.
Taken all together, however, the legal shackles on domestic workers create a perverse environment of dependency that is ripe for exploitation and maltreatment. Many maids accept salaries far below the minimum wage of HK$4,010 (US$517) a month lest they be sacked by their employers for "poor performance" and then find themselves penniless back in their home country two weeks later.
So while Hong Kong officials - from the chief executive on down - are now making all the right noises of sympathy and pledging justice for Erwiana, they have yet to offer any legal protections that would prevent such unconscionable crimes from happening again.
Until they do, the torture and abuse will continue.
Kent Ewing is a Hong Kong-based teacher and writer. He can be reached at kewing56@gmail.com Follow him on Twitter: @KentEwing1.
(Copyright 2014 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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Also See:
China - the Sleeping Giant Starts to Awaken! (Part 1)
08 June 2008
and
(Part 2)
15 May 2009
and
(Part 3)
02 September 2011
and
(Part 4)
02 July 2012
and
How Long Before China Crushes Taiwan?
17 December 2009
and
China is Stocking Up on Gold!
01 January 2014
and
Economic Collapse! How Did We Get Here?
(Part 3)
23 January 2014
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Thursday, January 23, 2014

Economic Collapse! How Did We Get Here? (Part 3)

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0% is the Highest Interest Rate the U.S. Economy can Afford
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Global Economic Collapse 2014 - Wall Street Advisor warns of the Coming Collapse
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Karen Hudes Predicts Lawlessness when U S Dollar Loses International Credit
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20 Early Warning Signs That We Are Approaching A Global Economic Meltdown
By Michael Snyder
January 23rd, 2014

Have you been paying attention to what has been happening in Argentina, Venezuela, Brazil, Ukraine, Turkey and China? If you are like most Americans, you have not been. Most Americans don't seem to really care too much about what is happening in the rest of the world, but they should. In major cities all over the globe right now, there is looting, violence, shortages of basic supplies, and runs on the banks. We are not at a "global crisis" stage yet, but things are getting worse with each passing day. For a while, I have felt that 2014 wuld turn out to be a major "turning point" for the global economy, and so far that is exactly what it is turning out to be. The following are 20 early warning signs that we are rapidly approaching a global economic meltdown...
#1 The looting, violence and economic chaos that is happening in Argentina right now is a perfect example of what can happen when you print too much money...
For Dominga Kanaza, it wasn’t just the soaring inflation or the weeklong blackouts or even the looting that frayed her nerves.
It was all of them combined.
At one point last month, the 37-year-old shop owner refused to open the metal shutters protecting her corner grocery in downtown Buenos Aires more than a few inches -- just enough to sell soda to passersby on a sweltering summer day.
#2 The value of the Argentine Peso is absolutely collapsing.
#3 Widespread shortages, looting and accelerating inflation are also causing huge problems in Venezuela...
Economic mismanagement in Venezuela has reached such a level that it risks inciting a violent popular reaction. Venezuela is experiencing declining export revenues, accelerating inflation and widespread shortages of basic consumer goods. At the same time, the Maduro administration has foreclosed peaceful options for Venezuelans to bring about a change in its current policies.
President Maduro, who came to power in a highly-contested election last April, has reacted to the economic crisis with interventionist and increasingly authoritarian measures. His recent orders to slash prices of goods sold in private businesses resulted in episodes of looting, which suggests a latent potential for violence. He has put the armed forces on the street to enforce his economic decrees, exposing them to popular discontent.
#4 In a stunning decision, the Venezuelan government has just announced that it has devalued the Bolivar by more than 40 percent.
#5 Brazilian stocks declined sharply on Thursday. There is a tremendous amount of concern that the economic meltdown that is happening in Argentina is going to spill over into Brazil.
#6 Ukraine is rapidly coming apart at the seams...
A tense ceasefire was announced in Kiev on the fifth day of violence, with radical protesters and riot police holding their position. Opposition leaders are negotiating with the government, but doubts remain that they will be able to stop the rioters.
#7 It appears that a bank run has begun in China...
As China's CNR reports, depositors in some of Yancheng City's largest farmers' co-operative mutual fund societies ("banks") have been unable to withdraw "hundreds of millions" in deposits in the last few weeks. "Everyone wants to borrow and no one wants to save," warned one 'salesperson', "and loan repayments are difficult to recover." There is "no money" and the doors are locked.
#8 Art Cashin of UBS is warning that credit markets in China "may be broken". For much more on this, please see my recent article entitled "The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?"
#9 News that China's manufacturing sector is contracting shook up financial markets on Thursday...
Wall Street was rattled by a key reading on China's manufacturing which dropped below the key 50 level in January, according to HSBC. A reading below 50 on the HSBC flash manufacturing PMI suggests economic contraction.
#10 Japanese stocks experienced their biggest drop in 7 months on Thursday.
#11 The value of the Turkish Lira is absolutely collapsing.
#12 The unemployment rate in France has risen for 9 quarters in a row and recently soared to a new 16 year high.
#13 In Italy, the unemployment rate has soared to a brand new all-time record high of 12.7 percent.
#14 The unemployment rate in Spain is sitting at an all-time record high of 26.7 percent.
#15 This year, the Baltic Dry Index experienced the largest two week post-holiday decline that we have ever seen.
#16 Chipmaker Intel recently announced that it plans to eliminate 5,000 jobs over the coming year.
#17 CNBC is reporting that U.S. retailers just experienced "the worst holiday season since 2008".
#18 A recent CNBC article stated that U.S. consumers should expect a "tsunami" of store closings in the retail industry...
Get ready for the next era in retail—one that will be characterized by far fewer shops and smaller stores.
On Tuesday, Sears said that it will shutter its flagship store in downtown Chicago in April. It's the latest of about 300 store closures in the U.S. that Sears has made since 2010. The news follows announcements earlier this month of multiple store closings from major department stores J.C. Penney and Macy's.
Further signs of cuts in the industry came Wednesday, when Target said that it will eliminate 475 jobs worldwide, including some at its Minnesota headquarters, and not fill 700 empty positions.
#19 The U.S. Congress is facing another deadline to raise the debt ceiling in February.
#20 The Dow fell by more than 170 points on Thursday. It is becoming increasingly likely that "the peak of the market" is now in the rear view mirror.
And I have not even mentioned the extreme drought that has caused the U.S. cattle herd to drop to a 61 year low or the nuclear radiation from Fukushima that is washing up on the west coast.
In light of everything above, is there anyone out there that still wants to claim that "everything is going to be okay" for the global economy?
Sadly, most Americans are not even aware of most of these things.
All over the country today, the number one news headline is about Justin Bieber. The mainstream media is absolutely obsessed with celebrity scandals, and so is a very large percentage of the U.S. population.
A great economic storm is rapidly approaching, and most people don't even seem to notice the storm clouds that are gathering on the horizon.
In the end, perhaps we will get what we deserve as a nation.
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The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?
By Michael Snyder
January 20th, 2014
http://theeconomiccollapseblog.com/archives/the-23-trillion-credit-bubble-in-china-is-starting-to-collapse-global-financial-crisis-next
Did you know that financial institutions all over the world are warning that we could see a "mega default" on a very prominent high-yield investment product in China on January 31st? We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in "sky-high interest rates" and "a precipitous plunge in credit". In other words, it could be a "Lehman Brothers moment" for Asia. And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well. Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion. That is an increase of $14 trillion in just a little bit more than 5 years. Much of that "hot money" has flowed into stocks, bonds and real estate in the United States. So what do you think is going to happen when that bubble collapses?
The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen. Never before has so much private debt been accumulated in such a short period of time. All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads. In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone. That is more than twice the amount that the U.S. government will pay in interest in 2014.
Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money. But the truth is that what has been happening in China surpasses all of their efforts combined. You can see an incredible chart which graphically illustrates this point right here. As the Telegraph pointed out a while back, the Chinese have essentially "replicated the entire U.S. commercial banking system" in just five years..
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire U.S. commercial banking system in five years," she said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said.
As with all other things in the financial world, what goes up must eventually come down.
And right now January 31st is shaping up to be a particularly important day for the Chinese financial system. The following is from a Reuters article... The trust firm responsible for a troubled high-yield investment product sold through China's largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.
Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.
If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly. A recent Forbes article explained why this is the case... A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well. In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk. Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both. The result? The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China. According to Forbes, M2 in China increased by 13.6 percent last year... And at the same time China’s money supply and credit are still expanding. Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth. Optimists say China is getting its credit addiction under control, but that’s not correct. In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.Overall, M2 in China is up by about 1000 percent since 1999. That is absolutely insane.
And of course China is not the only place in the world where financial trouble signs are erupting. Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered " a surprise fourth-quarter loss" ...
Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.
Germany's biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.
If current trends continue, many other big banks will soon be experiencing a "bond headache" as well. At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years. Investors overwhelmingly believe that yields are heading higher.
If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the "nightmare scenario" that I keep talking about.
But I am not the only one talking about it.
In fact, the World Economic Forum is warning about the exact same thing...
Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.
Ahead of next week's WEF annual meeting in Davos, Switzerland, the forum's annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.
This would create a "vicious cycle" of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.
So will a default event in China on January 31st be the next Lehman Brothers moment" or will it be something else?
In the end, it doesn't really matter. The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.
It is just a matter of time.

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Bank of America Is Actively Preparing For The Chinese January 31 Trust Default
Tyler Durden
January/19/2014
http://www.zerohedge.com/news/2014-01-19/bank-america-actively-preparing-chinese-january-31-trust-default
Last week we were the first to raise the very real and imminent threat of a default for a Chinese wealth management product (WMP) default - specifically China Credit Trust's Credit Equals Gold #1 (CEQ1) - and its potential contagion concerns. It seems BofAML is now beginning to get concerned, noting that over 60% of market participants expects repo rates to rise if a trust product defaults and based on the analysis below, they think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and back-coupon on the day. Crucially, with the stratospheric leverage ratios now engaged in such products, BofAML warns trust companies must answer some serious questions: will they stand back behind every trust investment or will they have to default on some or potentially many of them? BofAML believes the question needs an answer because investors and Trusts can’t have their cake and eat it too. The potential first default, even if it’s not CEQ1 on 1/31, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.
For those who have forgotten, below is a quick schematic of what a WMP looks like:
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 ...borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).

Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.
Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.
So the PBOC's efforts are merely exacerbating the situation for the worst companies... and as BofAML notes below, this is a major problem...
The 3bn CNY Beast Knocking
via BofAML's Bin Gao
CNY stands for the currency, and also a beast
CNY represents China’s official currency. It also stands for Chinese New Year, the biggest holiday for the country and the occasion for family reunions and celebration. But less familiar for many, however, the Year (?) itself actually stood for a beast which comes out every 365 days and eats everything along the way from bugs to humans. The holiday tradition started as a way for people to fend off the beast by getting together and lighting up the firecrackers.
At the same time, custom dictated that people also to paid their due to avoid becoming the beast’s target. In particular, it has been a tradition to settle all debt before the New Year. From the perspective of such folk culture, the trust product Credit Equals Gold #1, referred as CEQ1 hereafter, by China Credit Trust planned poorly for having the maturing date on the New Year, leaving a 3bn CNY beast running wild.
High probability for the trust product to default
Though the term default is used quite frequently, there are actually confusions on what constitutes a default in this case when talking to investors and especially onshore investment professionals. To simplify the issue, we define a default as failing to pay the promised contractual amount on time.
The product, CEQ1, is straightforward. It is CNY3.03bn financing with senior tranches of CNY3bn and junior tranche of CNY30mn. In principle, the senior tranches are also equity investment, but the junior tranche holder pledged assets for repurchasing senior investment at a premium. The promised rate was indexed to PBoC’s deposit rate with a floor for three classes of senior tranches at 9.5%, 10% and 11%, paid annually (detailed structure is illustrated below).
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In a sense, the product is in technical default already. The last coupon payment in December, with nearly all the money (CNY80mn) left in the trust account, came in at only 2.7%, falling far short of the promised yield. The bigger trouble is the CNY3bn principal payment, along with the delinquent coupon, on 31 January.
We see high probability of default on 31 January
Political or economic consideration: ultimately, given the government’s strong grip on financial institutions, default may be a political decision as much as an economic decision. From that perspective, CEQ1 would be a good candidate for default. The minimum investment in CEQ1 is CNY3mn, much more than the typical amount required for other trust investment and 75 times of per capita GDP in China. If defaults were to be used to send a warning signal to shadow banking investors, this group of rich investors may have been a good target because the government does not need to worry too much of them demonstrating in front of government offices.
Timing: there is never a good timing for deleverage because of risks involved. But the current job market situation provides a solid buffer should defaults and subsequent credit contraction slow down the economy growth. The government planned 9mn jobs last year; instead it has created more than 12mn by November. So the system could withstand a potential shock.
Financial capability: China Credit Trust has a bit over CNY10bn net assets, which some analysts cite as evidence of the trust company’s capability to fully redeem the product first and recover from the collateral asset later. However, the assets might not be liquid enough, so the net asset is not the best measure. Based on its 2012 annual report, the company has liquid asset of CNY3bn and short-term liability of CNY1.35bn, leaving liquid accessible fund of CNY1.65bn at most. ICBC for certain has much deeper pocket, but it has declared that it won’t be taking major responsibility.
Career concern: To certain extent, the timing was unfavorable for another reason, the ongoing anti-corruption campaign. It is reported that there are around 700 investors involved. On CNY3bn senior tranche investment, it averages CNY4.3mn per investor. We do not know the exact identity but with CNY3mn entry point, we know no one is a small-scale investor. Legally unjustified, if either China Credit Trust or ICBC decided to pay 100% with their capital, the decision maker would have to ensure that he does not have any business deals with any of the 700. Because if he does, his career or even his freedom could be in jeopardy in the current environment of ongoing anti-corruption campaign and strict scrutiny of shady deals/personal favors.
Questionable asset quality and uncertain contingent claim: There are cases in the past of near default, but most of them involved collateral of real estate assets, which have at least appreciated over the years. The appreciation of collateral assets makes it easier for the third party to step in by paying back investors and taking over the collateral assets. This particular product involves coal-mining assets whose value has been decreasing over the last couple of years. Moreover, there have been multiple claimants on these assets, as exemplified by the sale of Yangjiagu coal mine. Although the mine was 51% pledged through two levels of ownership structure, only 20% of the sales proceed accrued to trust investors (Exhibit 1 above). Such a low percentage would be a deterrence and concern to whoever contemplating a takeover of the collateral assets.
Other cases less relevant: In the past, one way to deal with the issue was for banks to lend to shareholders of the existing collateral asset owners for them to payback investors, with explicit or implicit local government guarantees. Shangdong Hailong’s potential default on bond was avoided this way last year. However, in the current case, the owner has been arrested for illegal fund raising, making the past precedence less applicable.
Putting all the above reasons together, we think there is a high probability for CEQ1 to default on 31 January, i.e. no full redemption of principal and backcoupon on the day.
Immediate impact would be for China rates curve to flatten
The case has been widely covered in the media. However, many still believe one way or the other the involved parties will find a last minute solution to fully redeem the maturing debt. So if the trust is not paid, we believe it will be a big shock to the market.
China rates market reaction, however, might not be straightforward. On the one hand, default would likely lead to risk-averse behavior, arguing for lower rates. On the other hand, market players would likely hoard cash in such an event, leading to tighter liquidity condition and pushing money rates higher.
We think that both movements are likely to ensue initially, meaning higher repo/SHIBOR rates and lower CGB yield if default were to realize. We suggest positioning likewise by paying 1y IRS and long 5y CGB. On the swap curve itself, we think the immediate reflection will be a bear flattening move.
Interestingly, an informal survey conducted on WeChat among finance professionals suggests the same kind of repo rate reaction (Chart 1). We think this survey is important because we believe these investment professionals will likely behave accordingly because the default event is not priced in and hard to hedge a priori.
 
 
Trust company can’t have their cake and eat it too
Of course, we can’t rule out that the involved parties do find a solution to avoid default. However, with a case as clear cut to us as this one favoring default, we believe such outcome would send a strong signal to investors that the best investment is to buy the worst credit.
Thus, we believe the near term market reaction with no default would be for the AA credit to shine brightly since this segment has been under pressure for quite some time. Trust investment would be met with enthusiasm and trust assets would likely expand further.
However, we see a fundamental problem in the industry; the leverage ratio has gone to a level which requires investors and trust companies to answer some serious questions: will trust company stand back behind every trust investment or will trust company have to default on some or potentially many of them? We believe the question needs an answer because the trust companies can’t have their cake and eat it too.
For the industry, the AUM/equity ratio has nearly doubled from 23 to 43 in less than three years during the period of 4Q2010 to 3Q2013 (Chart 2). Some in the industry has argued that one should only count the collective trusts since other trusts are originated by non-trust players like banks. Thus, trust companies have no responsibility for paying investors other than collective trusts.
We see two problems.
Even if we accept the trust companies’ argument, it is still questionable whether trust companies would be able to pay even a reasonable amount of default. The growth of leverage on collective trusts was much more aggressive. Collective trust AUM/equity ratio was 2.7 in 1Q2010 and 4.7 in 4Q2010 (Chart 2). It rose to 10 by 3Q2013, more than doubled in less than three years and more than tripled in less than four years. Along the way, the average provision has dropped from 84bp to 34bp when measured against collective AUM.
As the case of CEQ1 illustrates, as long as full redemption is on the table, no involved party could walk away totally clean. CEQ1 is a case of collective trust, but the ICBC still faces the pressure to pay. If the bank is being pressured to pay in the case of collective trust default, trust companies will likely be pressured to pay as well should some non-collective trusts get into trouble. If trust companies are on the line for the total AUM, their financial condition is even shakier, with average provision covering barely 7bp of total AUM as of 3Q2013.
On longer term market trend
Based on the analysis in the above section, we see a possibility for trust companies to have to let some trust products default with such high leverage and so few provisions. This is especially likely the case given that there will be more and more trust redemption this year and next year as a result of the fast expansion of this industry over the last couple of years and short duration of such products.
The heaviest redemption in collective trusts this year will arrive in the 2Q (Chart 3). Given that the financial system is stretched thin and there were more cases of near defaults on smaller amount of redemption last year (three cases in December alone), we believe some form of default is almost inevitable in the near term.
The potential first default, even if it’s not CEQ1 on 31 JANUARY, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event. Over the last year, China appeared to be mirroring what happened in the US during 2007, the spike of money rate (much higher repo/SHIBOR), the steepening of money curve (14d money much more expensive than overnight and 7d), and small accidents here and there (junior tranches of a few wealth management products offered by Haitong Securities losing more than 60%, a few small trusts and now CEQ1’s redemption difficulty).
Theoretically, China’s risk is best expressed using a China related instrument, but we also think the more liquid expression of China goes through the south pacific. The following points list our longer views on China and Australia rates.
We have liked using Australia rates lower as a way to express our China concern and we continue recommending doing so as a theme.
We recommend long CGB and underweight credit product. The risk for such positioning in the near term is no CEQ1 default. But we believe any pain suffered due to overt market manipulation to avoid default will be short lived since it has become much harder to keep the debt-heavy system in balance and the credit spread is bound to widen.
After a brief flattening on CEQ1 default, we see swap curve steepening as being more likely on more default threatening growth leading to easy monetary policy and more issuance going to the bond market.
We look for higher CCS rates due to the fact that the currency forward will more likely start expressing the risk.
 
As Michael Pettis, Jim Chanos, Zero Hedge (numerous times), George Soros, Barclays, and now BofAML have explained... Simply put -
"There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years."
The "eerie resemblances" - as Soros previously noted - to the US in 2008 have profound consequences for China and the world - nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector.

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Also See:
Food Shortage, Then Anarchy! 
 25 July 2012
http://arcticcompass.blogspot.ca/2012/07/food-shortage-then-anarchy.html
and
Disasters Happen! Be Prepared!
(Part 1)
31 March 2011
http://arcticcompass.blogspot.ca/2011/03/disasters-happen-be-prepared.html
and
(Part 2)
30 August 2012
http://arcticcompass.blogspot.ca/2012/08/disasters-happen-be-prepared-part-2.html
and
The Collapse of the Entire World’s Economic System has Begun!
18 March 2013
http://arcticcompass.blogspot.ca/2013/03/the-collapse-of-entire-worlds-economic.html
and
Economic Collapse! How Did We Get Here?
(Part 2)
28 September 2013
and
Are We Facing a Global Financial Crisis?
31 May 2011
http://arcticcompass.blogspot.ca/2011/05/are-we-facing-global-financial-crisis.html
and
Financial Crunch! Economic Collapse!
(Part 1)

31 July 2008
http://arcticcompass.blogspot.ca/2008/07/financial-crunch-economic-collapse.html
and
(Part 2)
20 November 2008
http://arcticcompass.blogspot.ca/2008/11/financial-crunch-economic-collapse-part.html
and
(Part 3)
25 January 2009
http://arcticcompass.blogspot.ca/2009/01/financial-crunch-economic-collapse-part.html
and
(Part 4)
17 April 2009
http://arcticcompass.blogspot.ca/2009/04/financial-crunch-economic-collapse-part.html
and
(Part 5)
23 June 2009
http://arcticcompass.blogspot.ca/2009/06/financial-crunch-economic-collapse-part.html
and
(Part 6)
23 August 2009
http://arcticcompass.blogspot.ca/2009/08/financial-crunch-economic-collapse-part.html
and
(Part 7)
30 November 2009
http://arcticcompass.blogspot.ca/2009/11/xxxx.html
and
(Part 8)
23 February 2010
http://arcticcompass.blogspot.ca/2010/02/debt-dynamite-dominoes-coming-financial.html
and
(Part 9)
28 August 2010
http://arcticcompass.blogspot.ca/2010/08/financial-crunch-economic-collapse-part.html
and
(Part 10)
13 January 2011
http://arcticcompass.blogspot.ca/2011/01/financial-crunch-economic-collapse-part.html
and
(Part 11)
29 April 2011
http://arcticcompass.blogspot.ca/2011/04/financial-crunch-economic-collapse-part.html
and
(Part 12)
28 July 2011
http://arcticcompass.blogspot.ca/2011/07/financial-crunch-economic-collapse-part.html
and
(Part 13)
04 April 2012
(Part 15)
02 November 2012
and
Recession? ... Depression? ... What is Going On?
(Part 1)
06 October 2008
(Part 2)
02 February 2009
and
(Part 3)
19 April 2009
and
(Part 4)
02 August 2009
and
(Part 5)
17 September 2010
and
(Part 6)
17 September 2010
and
Jobs, Jobs, Where are the Jobs?
(Part 1)
20 April 2010
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