World financial system as stretched as before 2008 crash

Chris Martenson – Rising Oil Price Will Pop this Bubble

USA Watchdog

What is going to cause this financial bubble to pop? Economic researcher and futurist Chris Martenson says, “The price of oil is likely going to be the pin that pricks these bubbles. No central banker is going to do it. They are deathly afraid of these markets they have created. . . . They are afraid of a downturn in the markets, and they won’t willingly go there. What could force that is the price of oil. . . . The higher price of oil is going to really harm some weak players out there. . . . The chain reaction always starts with somebody not being able to pay their debt back.”

If The Credit Markets Freeze, The Economic Decline Will Be Spectacular:Wolf Richter

wolfstreet http://wolfstreet.come. . . .

We Are Near The 'End Game' The Entire System Is About To Come Down

This article was written for the Telegraph
'It is frankly scary': World financial system as stretched as before 2008 crash

Stuff,

24 January, 2018

The world financial system is as dangerously stretched today as it was at the peak of the last bubble but this time the authorities are caught in a "policy trap" with few defences left, a veteran central banker has warned.

Nine years of emergency money has had a string of perverse effects and lured emerging markets into debt dependency, without addressing the structural causes of the global disorder.

"All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten," said Professor William White, the Swiss-based head of the OECD's review board and ex-chief economist for the Bank for International Settlements.

South African retailer Steinhoff also tapped this obscure market, borrowing $1.4b.

White said disturbing evidence of credit degradation is emerging almost daily. The latest is the disclosure that distressed UK construction group Carillion quietly raised NZ$213m through German Schuldschein bonds.

Schuldschein loans were once a feature of rock-solid lending to family Mittelstand companies in Germany.

The transformation of this corner of the market into a form of high-risk shadow banking shows how the lending system has been distorted by quantitative easing (QE) and negative interest rates.

White said there was an intoxicating optimism at the top of every unstable boom when people convince themselves that risk is fading, but that is when the worst mistakes are made.

For the first time in 18 years, the US president is attending the economic summit in Davos, Switzerland - a gathering of world leaders, NGOs, CEOs and massive amounts of security.

Stress indicators were equally depressed in 2007 just before the storm broke.

This time central banks are holding a particularly ferocious tiger by the tail. Global debt ratios have surged by a further 51 percentage points of GDP since the Lehman crisis, reaching a record 327 per cent (IIF data).

This is a new phenomenon in economic history and can be tracked to QE liquidity leakage from the West, which flooded East Asia, Latin America, and other emerging markets, with a huge push from China pursuing its own venture.

"Central banks have been pouring more fuel on the fire," he told The Daily Telegraph, speaking before the World Economic Forum in Davos.

"Should regulators really be congratulating themselves that the system is now safer? Nobody knows what is going to happen when they unwind QE. The markets had better be very careful because there are a lot of fracture points out there," he said.

"Pharmaceutical companies are subject to laws forcing them to test for unintended consequences before they launch a drug, but central banks launched the huge social experiment of QE with carelessly little thought about the side-effects," he said.

The US Federal Reserve is already reversing bond purchases - ignoring warnings by former Fed chair Ben Bernanke - and will ratchet up the pace to US$50b a month this year.

It will lead to a surge in supply of US Treasury bonds just as the Trump Administration's tax and spending blitz pushes the US budget deficit toward US$1 trillion, and China and Japan trim Treasury holdings.

It has the makings of a perfect storm. At best, the implication is that yields on 10-year Treasuries - the world's benchmark price of money - will spike enough to send tremors through credit markets.

The edifice of inflated equity and asset markets is built on the premise that interest rates will remain pinned to the floor.

The latest stability report by the US Treasury's Office of Financial Research warned that a 100 basis point rate rise would slash US$1.2 trillion of value from the Barclays US Aggregate Bond Index, with further losses once junk bonds, fixed-rate mortgages, and derivatives are included.

The global fall-out could be violent. Credit in dollars beyond US jurisdiction has risen fivefold in 15 years to over US$10 trillion. "This is a very big number. As soon as the world gets into trouble, a lot of people are going to have trouble servicing that dollar debt," said White. Borrowers would suffer the double shock of a rising dollar, and rising rates.

While banks now have high capital buffers, the risk has migrated: to investment funds concentrated in crowded trades. The share of equities traded in "dark pools" outside the exchanges has mushroomed to 33 per cent.

One worry is what will happen to "risk parity" funds when the inflation cycle turns. RBI Capital warned in its investor letter that these funds could lead to a "liquidity crash".

Deutsche Bank has advised clients to take out June 2018 "put" options on the S&P 500 - a hedge against a market slide - arguing that the rally looks stretched and that risk parity funds will amplify any correction.

These funds manage risk by matching bonds and equities through dynamic weighting. The strategy worked during the "Goldilocks" phase of low inflation and rising stock markets. Both wings of the trade did well. The danger is that both could go wrong at the same.

Whether the inflation cycle is really turning, and how fast, is the elemental question of this bull market. What is clear is that the US has closed the output gap and is hitting capacity constraints.

The great disinflation of the last three decades was essentially a global "supply shock".

The opening-up of China and the fall of the Berlin Wall added 800m workers to the traded economy, depressing wages and unleashing a tsunami of cheap goods.

The "Amazon effect" of digital technology capped price rises. The demographics of the baby boom era played its part by boosting the global savings glut.

But there was another feature that is often neglected. Central banks intervened "asymmetrically" with each cycle, letting booms run but stepping in with stimulus to cushion busts. The BIS says one result was to keep insolvent "zombie" companies alive and block the creative destruction that leads to rising productivity.

"Everything could now go into reverse: the baby boomers are gone; China's working age population is falling; and zombie companies are going to be forced out of business at last as borrowing costs rise," said White.

While higher inflation is needed in one sense to right the global ship - since it lifts nominal GDP faster, and whittles down debt - the danger is that the shock of higher rates will hit first.

Central banks are now caught in a "debt trap". They cannot hold rates near zero as inflation pressures build, but they cannot easily raise rates either because it risks blowing up the system.

"It is frankly scary," said White.

The authorities may not yet have reached the end of the road but this strategy is clearly pregnant with danger.

Global finance has become so sensitive to monetary policy that central banks risk triggering a downturn long before they have built up the safety buffer of 400 to 500 basis points in interest rate cuts needed to fight recessions.

"We are running out of ammunition. I am afraid that at some point this is going to be resolved with a lot of debt defaults. And what did we do with the demographic dividend? We wasted it," he said.

- The Telegraph, London

One minute to midnight for global economy

New Zealanders, especially pay attention. We are not being told about this as government and media are feeding us chickenshit.

This is the august, right-wing conservative DailyTelegraph.

Doomsday clock for global market crash strikes one minute to midnight as central banks lose control

China currency devaluation signals endgame leaving equity markets free to collapse under the weight of impossible expectations

It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations. Photo: Reuters

the Telegraph,

16 August, 2015

When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.

Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

The FTSE 100 has now erased its gains for the year, but there are signs things could get a whole lot worse.

1 - China slowdown

China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil- and resource-rich emerging markets.

The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.

The People’s Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame.

Data for exports showed an 8.9pc slump in July from the same period a year before. Analysts expected exports to fall only 0.3pc, so this was a huge miss.

The Chinese housing market is also in a perilous state. House prices have fallen sharply after decades of steady growth. For the millions who stored their wealth in property, it makes for unsettling times.

2 - Commodity collapse

The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.

The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe.

Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about $50 per barrel.

Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom.

The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.

3 - Resource sector credit crisis

Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices.

With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.

Nowhere has this been felt more acutely than shale oil and gas drilling in the US. Tumbling oil prices have squeezed the finances of US drillers. Two of the biggest issuers of junk bonds in the past five years, Chesapeake and California Resources, have seen the value of their bonds tumble as panic grips capital markets.

As more debt needs refinancing in future years, there is a risk the contagion will spread rapidly.

4 - Dominoes begin to fall

The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.

The central banks are rapidly losing control. The Chinese stock market has already crashed and disaster was only averted by the government buying billions of shares. Stock markets in Greece are in turmoil as the economy grinds to a halt and the country flirts with ejection from the eurozone.

Earlier this year, investors flocked to the safe-haven currency of the Swiss franc but as a €1.1 trillion quantitative easing programme devalued the euro, the Swiss central bank was forced to abandon its four-year peg to the euro.

5 - Credit markets roll over

As central banks run out of silver bullets then, credit markets are desperately seeking treprice risk. The London Interbank Offered Rate (Libor), a guide to how worried UK banks are about lending to each other, has been steadily rising during the past 12 months. Part of this process is a healthy return to normal pricing of risk after six years of extraordinary monetary stimulus. However, as the essential transmission systems of lending between banks begin to take the strain, it is quite possible that six years of reliance on central banks for funds has left the credit system unable to cope.

Credit investors are often far better at pricing risk than optimistic equity investors. In the US while the S&P 500 (orange line) continues to soar, the high yield debt market has already begun to fall sharply (white line).

6 - Interest rate shock

Interest rates have been held at emergency lows in the UK and US for around six years. The US is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency. UK rate rises are expected to follow shortly after.

7 - Bull market third longest on record

The UK stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.

UK markets have been a beneficiary of the huge balance-sheet expansion in the US. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.

8 - Overvalued US market

In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.

Cyber shock

Cybergeddon? Survey warns of internet disruption on scale of 2008 crisis

The world is on the verge of a cyber shock “similar to the 2008 financial crisis,” a new study says, outlining major triggers for potential disruption and urging governments and organizations to learn from the experience gained during the credit crunch

RT,

23 April, 2014

Zurich Insurance has drawn a parallel between the mortgage market problems, which resulted in the global financial crisis seven years ago, and a potential major cloud provider failure, the consequences of which might be just as grave.

“Just imagine if a major cloud service provider had a ‘Lehman moment’, with everyone’s data there on Friday and gone on Monday,” the report written by the Swiss insurance group in cooperation with the Atlantic Council think tank says. “If that failure cascaded to a major logistics provider or company running critical infrastructure, it could magnify a catastrophic ripple running throughout the real economy in ways difficult to understand, model or predict beforehand.”

Problems in the US sub-prime mortgage market in 2008 led to banking crisis which later resulted in a global economic downturn.

The current “interconnected nature of the internet” leads to the increasing danger of cyber risks, spurring similar type of scenario.

“Few people truly understand their own computers or the internet, or the cloud to which they connect, just as few truly understood the financial system as a whole or the parts to which they are most directly exposed,” Chief Risk Officer at Zurich Insurance, Axel Lehmann, said in a statement.

The new study says part of the problem in 2008 was that before the credit crunch “risks were assessed by financial institutions individually” and urges governments and organizations not to repeat the same mistake when it comes to tackling cyber threats.

The study warns people against being misled by the fact “the internet has been incredibly resilient (and generally safe) for the past few decades.” With the system getting ever more complex and ever more connected to real life, bigger shocks to it are unavoidable.

A company should no longer focus primarily on its own internal cyber security as an threat might be coming from outsourced services it’s getting or from its suppliers. Those are on the list of the seven “risk pools” the study outlines.

Seven hundred and forty million data files were potentially exposed or stolen worldwide in 2013, making the year the worst in terms of the internet security thus far, according to the statistics given by the Online Trust Alliance and cited in the survey, which warns that the situation is only going to become aggravated.

“While our society’s reliance on the internet grows exponentially, our control of it only grows linearly, limited by outdated government procedures and ineffective governance.”

One of the major proposals in the report is supporting the idea put forward earlier by Microsoft, of establishing a G20+20 group, 20 governments and 20 global information and communications technology firms – to work out ways of ensuring viable security in cyberspace.

Peak Everything

Now That U.S. & China Have Picked The Low-Hanging Fruit, Peak Everything Looms

Charles Hugh-Smith

Zero Hedge,

10 April, 2014

With no plan to manage an economy in which expanding credit no longer generates growth, the two nations are rapidly reaching Peak Everything.

Let's call the strategy of picking all the low-hanging fruit in an economy Plan A: you know, expanding credit, lowering interest rates, building infrastructure, fueling speculative frenzies, all the good stuff that fans the flames of "growth."

Now that the central banks and political leadership of the U.S. and China have plucked all the low-hanging fruit, they have no Plan B. With no plan to manage an economy in which expanding credit no longer generates growth, the two nations are rapidly reaching Peak Everything:

• Peak Leverage
• Peak Phantom Collateral
• Peak Mal-Investment
• Peak Ghost Malls
• Peak Doing More of What's Failed Spectacularly
• Peak Propaganda
• Peak Smog
• Peak Housing Bubble
• Peak Keynesian Cargo Cult
• Peak Clueless Leadership
• Peak Central Bank Manipulation
• Peak Phony Statistics
• Peak Debt-Serfdom
• Peak Crony-Capitalism
• Peak Group-Think

You get the idea.

Gordon T. Long and I discuss the ramifications of the low-hanging fruit having been plucked in this 26-minute slide presentation:

Chine's economy

China's Credit Pipeline Slams Shut: Companies Scramble For The Last Drops Of Liquidity

Zero Hedge,

25 March, 2014

One of our favorite charts summarizing perfectly the Chinese credit bubble, better than any other, is the following which compares bank asset (i.e., loan) creation in China vs the US.

It goes without saying that while the blue line has troubles of its own (namely finding the proper rate of liquidity lubrication to keep over $600 trillion in derivatives from collapsing into an epic gross=net garbage heap), it is the red one, that of China, where $1 trillion in credit was created in the fourth quarter alone, that is clearly unsustainable for the simple reasons that i) China will quickly run out of encumbrable assets and ii) the bad, non-performing loan accumulation has hit an exponential phase, which incidentally is why Beijing is scrambling to slow down the "flow" from the current unprecedented pace of $3.5 trillion per year.

It is also because of this wanton and mindblowing capital misallocation (the de novo created debt goes not into profitable, cash flow generating ventures, but into fixed asset investments which create zero and potentially negative cash flow, due to China's already epic overinvestment resulting in ghost cities, and building that fall down weeks after their erection) that China has finally decided to provide lenders with the other much needed component of the return equation: risk. This, in the form of debt defaults, something unheard of in China for two decades.

Which brings us to today, when we find that China's credit formation, until now proceeding at a breakneck speed, has suddenly ground to a halt. Reuters explains:

Some of China's struggling firms are finally getting the reception that regulators have been hoping for - a cold shoulder from banks in the form of smaller and costlier loans.

 

Reuters has contacted over 80 companies with elevated debt ratios or problems with overcapacity. Interviews with 15 that agreed to discuss their funding showed that more discriminate lending, long a missing ingredient of China's economic transformation, has become a reality.

 

Up against a cooling Chinese economy and signs that authorities will not step in every time a loan goes bad, banks are becoming more hard-nosed and selective about whom they lend to.

 

...

 

For household goods maker Elec-Tech International Co Ltd (002005.SZ), less credit is the new reality. Its bank cut its borrowing limit by 500 million yuan ($80.79 million) to no more than 2.5 billion yuan this year, said Zhang, an official at Elec-Tech's securities department.

 

"Last year, the bank gave us a discount on our interest rates. This year, we probably won't get any discount," Zhang who declined to give his full name said. "It feels like banks are not lending and their checks are becoming more rigorous."

 

...

 

There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks.

 

"Interest rates are going up 10 percent for the entire industry," said Wang Lei, a finance department manager at PKU HealthCare Corp. "Obtaining loans is getting difficult and expensive."

Here's why PKU Healthcare will likely be among the first to experience what happens when the liquidity runs out:

PKU HealthCare, which is controlled by Peking University and makes bulk pharmaceuticals, has struggled to remain profitable. Its debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio exceeded 60 at the end of September, four times the average for listed Chinese companies from the sector.

That's the kind of leverage that not even Jefferies would sign a "highly confident letter" it can raise a B2/B- debt deal at 10% or less. It is also a huge problem for Chinese corporates which suddenly realize they have just a tad too much debt on their books.

Some gauges of China's corporate debt are already flashing red. Non-financial firms' debt jumped to 134 percent of China's GDP in 2012 from 103 percent in 2007, according to Standard & Poor's. 

 

It predicted China's corporate debt will reach "stratospheric levels" and become the world's largest, overtaking the United States this year or next.

 

Fearing a wave of defaults as China's economy cools after decades of rapid growth, regulators in the past two years told banks to cut off financing to sectors plagued by excess capacity such as steel and cement. 

 

Experts say banks were at first slow to respond, but in the past few months, banks have started turning down credit taps.

 

"We have become more prudent in issuing loans," said a spokesman for Bank of Ningbo. He added that the bank has intensified communication with companies in troubled sectors or borrowers deep in debt.

 

"Under normal circumstances, we would review company loans every quarter or every six months, but for the sensitive cases, we will step up channel checks and work closely with the companies."

 

Another manager at a regional Chinese bank said it was overhauling its lending in cities identified as high-risk, such as Urdos and Wenzhou. Located in Inner Mongolia, Urdos is infamous for its clusters of empty apartment blocks that pessimists say is an emblem of China's housing bubble. Wenzhou, is China's entrepreneurial hotbed that recently lost its shine after local property boom went bust.

So with increasingly more uber-levered companies suddenly blacklisted by the banks, what do they do? Why go to the shadow banking system for last ditch liquidity of course, where it will cost them orders of magnitude more to stay viable for a few more weeks or months.

Ss companies bend the rules, risks shift outside the banking system into the universe of networks of seemingly unrelated firms connected by murky financial deals. For example, trade loans subsidized by the government to help selected sectors are quietly re-directed by companies to other unrelated businesses, firms say. New financing methods also emerge as easy credit dries up. 

 

The latest plan hatched by a cash-strapped aluminum end-user involves having banks buy the metal and re-selling it to firms who pay out monthly loan plus interest.

How do you spell re-re-rehypothecation again... while selling the collateral.... again? Remember this: it really does explain all one needs to know about China.

"The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer."

Anyway, continuing:

Others such as Xiamen C&D Inc, an import and export firm, are directly cashing in on firms' thirst for funds. Xiamen C&D, which borrows at less than 6 percent per year is offering loans of several hundred thousand yuan to smaller firms at 7-8 percent, said Lin Mao, the secretary of Xiamen's board of directors.

 

For larger companies, typical loans amount to 20-30 million yuan, and are 90 percent insured by Chinese insurers, he said.

 

Banks grow more aware of the risks. But rather than pull the plug on teetering firms, some bankers say they prefer a slow exit to keep them afloat for as long as possible to claw back their loans.

Unfortunately, for most the can kicking is now over. Which brings us to the second part of this story - China's housing bubble, and specifically how its foundations - China's own property developer firms - just imploded as a result of all the above. Also from Reuters:

China's property developers are turning to commercial mortgage-backed securities and looking at other alternative financing as creditors grow more discriminating in the face of rising concerns about the country's real estate and debt markets. 

 

Bond buyers are shying away from second-tier developers because property sales have cooled as the economy slows. The expected bankruptcy of a local developer and the country's first domestic bond default this month have heightened scrutiny of borrowers.

 

The property companies have a renewed sense of urgency to raise capital after U.S. Federal Reserve Chairman Janet Yellen indicated the central bank, which sets the tone globally for borrowing costs, may raise interest rates as early as the spring of 2015, sooner than many investors had anticipated. Higher rates mean higher borrowing costs, both for the companies and for their home-buying customers. 

 

Highlighting the search for alternative funding avenues, property fund MWREF Ltd earlier this month issued the first cross-border offering of commercial mortgage-backed securities (CMBS) since 2006. The offer was priced at a yield lower than two dollar bonds issued last week, IFR, a Thomson Reuters publication, said.

 

"The market will see more of these products," said Kim Eng Securities analyst Philip Tse in Hong Kong. "It's getting harder to borrow with liquidity so tight in the bond market. It's getting harder for smaller companies to issue high-yield bonds."

 

The notes, issued through a MWREF subsidiary, Dynasty Property Investment, were ultimately backed by rental income from nine MWREF shopping malls in China and were structured to give offshore investors higher creditor status than is normally the case with foreign investors. MWREF is managed by Australian investment bank Macquarie Group Ltd, which declined to comment.

 

Beijing Capital was the first Hong Kong-listed developer to issue dollar senior perpetual capital securities last year, an equity-like security that does not dilute existing shareholders.

 

"As market liquidity is changing constantly, we have to keep adapting and exploring different funding channels," said Bryan Feng, the head of investor relations.

 

Chinese regulators last week allowed developers Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. to offer a private placement of shares, opening up a fund raising avenue that had been closed for nearly four years.

 

New rules were also unveiled last week allowing certain companies to issue preferred shares, including companies that use proceeds to acquire rivals.

 

"As liquidity tightens and developers see more pressure...they may consider M&A via preferred shares," said Macquarie analyst David Ng.

CMBS, senior perpetuals, preferreds: what is the common theme? This is last ditch capital, far more dilutive of equity, and one whichalways appears just before the final can kick. As such, it means that the credit game in China is over. And now the only question is how long before the market realizes the jig is up.

Some already have. As we reported last week, "Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland."

In other words, those who sense which way the wind is blowing have already entered liquidation mode. Because they know that those who sell first, sell best. Soon everyone else will follow in their shoes, unfortunately they will be selling into a bidless market.

Until then, we will greatly enjoy as finally, after many years of delays, the dominoes start falling.

As of March 15, Chinese developers had issued 15 U.S. dollar bonds raising $7.1 billion so far this year, compared with 23 issues that raised $8.1 billion in the year-earlier period. "That said, quite a number of developers have demonstrated the ability to access alternative markets, such as the offshore syndicated loan markets as another means of raising capital," said Swee Ching Lim, Singapore-based credit analyst with Western Asset Management.

 

Offshore syndicated loans for Chinese developers have reached $1.17 billion so far in 2014, compared with $9.8 billion for all of last year, Thomson Reuters LPC data shows. Demonstrating the change in investor sentiment, bonds issued by Kaisa Group in January with a yield of 8.58 percent are now yielding 9.5 percent. The company did not immediately respond to a request for comment.

 

Times Property issued a 5-year bond this month, not callable for 3 years, to yield 12.825 percent. A similar instrument from China Aoyuan Property in January was priced at 11.45 percent. Both Kaisa and Times are in the B-rating "junk" category, which is four notches above a default rating.

 

Property prices on the whole are still rising, but there are signs of stress in second and third tier cities. Early indications of property sales in March, traditionally a high season, were not promising, although final figures for the month would not be available until April, said Agnes Wong, property analyst with Nomura in Hong Kong. That may mean developers have to cut prices and investor sentiment may worsen.

 

"This is hurting the cash flows of the smaller players," she said.

 

The market stresses ultimately could lead to the reshaping of the property development sector, said Kenneth Hoi, chief executive of Powerlong Real Estate Holdings Ltd (1238.HK), a mid-sized commercial developer.

 

"In the future, only the top 50 will be able to survive," he said during a briefing on the company's earnings on March 13. "Many small ones will exit from the market."

The fun is about to start.