The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

China: Is Another Financial Crisis Brewing?

Financial fraud is a major problem in the China markets. When US analysts quote the earnings and sales of Chinese companies, we always say, how do they know that any of these numbers are real? Even companies that were audited by the world’s largest CPA firms committed fraud, fooling the auditors, and all the investors. The article below is an excerpt from a China news service, Caixin:

Bond Woes in China Raise Concerns of Financial Meltdown

By Zhang Yuzhe, Han Yi, Guo Nan and Han Wei

(Beijing) — Heightened volatility in China’s bond market — in part fueled by a recent bond default that roiled the market — is fueling concern about whether another financial meltdown is brewing similar to last year’s stock market rout.

Shenzhen-listed Sealand Securities sparked the turmoil last week after the emergence of online rumors— later proved true — that the midsize brokerage had refused to honor a bond transaction purportedly worth 10 billion yuan ($1.44 billion) with Lang Fang Bank.

Sealand balked on the grounds that the contract was made by two rogue employees who used a fake company seal to initiate the transaction. This left the bank temporarily holding the bonds for Sealand with a huge paper loss as bond prices dropped.

The episode soon sent shock waves through the already volatile bond market. When Sealand confirmed an investigation by the securities regulator on Dec. 15, China’s government bond futures plunged, with the 10-year bond futures crashing by 2%, the biggest daily drop in history.

To be sure, China’s bond market was already under severe pressure as regulators tightened rules over “shadow banking” activities, a major source of borrowed funding for the bond market. Then, too, there was a U.S. Fed rate increase and subsequent hawkish comments, raising yields and lowering bond prices. Plus, all this came just as banks were becoming extra cautious. They need to make sure their capital reserves are adequate on the 15th of each month, so they were in no mood to hold bonds when they needed the funds and prices were declining.

Our comments: When a bubble bursts, the financial games and frauds are exposed. As Warren Buffets once said years ago, “when the tide goes out, you see who has been swimming naked.”

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