China Admits First Official Local-Government Loan Default

There has been a growing number of defaults since China first broke its non-payment cherry earlier this year. Names like Chaori Solar have “promised” to pay back the money they owe, only to falter on that promise mere months after a temporary reprieve. Wide-scale panic has for now been avoided by liquidity provision to banks (not shadow-banks) and mini-stimulus which many assumed was targeted at keeping the state-owned enterprises (SOEs) alive no matter what. That ‘hope’ all changed this weekend… As Bloomberg reports, Qilu Bank’s annual report shows that Licheng district urban construction development company has not paid its loan interest…”To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan.”

As Bloomberg reports,

Bank loans of a local-government urban construction development co. in eastern province of Shandong were in default by end-2013, according to the full-year earnings report of Qilu Bank released in April.

The urban construction development co. of Licheng district in Jinan city, capital of Shandong, owes interest of 6m yuan [which we find fascinatingly small – how bad are things if they cannot fund this?]

The development co. holds a 0.08% stake in Qilu Bank [indicative of the interconnectedness within China]

As Nomura economist Zhang Zhiwei wrote in note today that:

“To the best of our knowledge, this is the first official disclosure of a LGFV default on a bank loan.”

For those who need a refresh course on why the Chinese situation is rapidly going from bad to worse, read these several most recent comprehensive articles on the topic:

• “The Pig In The Python Is About To Be Expelled”: A Walk Thru Of China’s Hard Landing, And The Upcoming Global Harder Reset 
• China Folds On Reforms – Bails Out 2nd Shadow-Banking Default After “Last Drop Of Blood” Threats
• Chinese Stocks Tumble On Contagion Concerns From First Shadow-Banking Default
• Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years)
• Welcome To The Currency Wars, China (Yuan Devalues Most In 20 Years)