Recently, China has experienced its first-ever default of a corporate bond and this default has led to the idea that China may experience a ‘Bear Stearns moment’ or a ‘Lehman moment’. The Chinese solar company Shanghai Chaori Solar Energy Science and Technology Company announced that it cannot pay interests in the amount of roughly $14.6 million on its 11 Chaori bond. The interest payments were due on March 7th. Unlike the fall of Bear Stearns and the bankruptcy of Lehman Brothers, Chaori’s default did not change the market’s perception of inherent credit risk in the economy or cause a liquidity crunch. The reason why Chaori’s default did not impact the economy the same way Bear Stearns and Lehman Brothers did is because it was known for some time that the solar company was in trouble.
Despite this, Lombard Street Research’s Diana Choyleva believes that “China’s Bear Stearns moment may strike any time”. China’s overall debt reached 238% of GDP last year. Choyleva writes that China could “use its ability to absorb loan losses to postpone the debt problem and defer financial market reform”. Choyleva also argues that even with reforms China faces financial distress, but without the financial reform, the debt will continue to rise and will cause a bigger crisis. Choyleva predicts that if China does not choose to implement, China could experience a growth rate below the rate of global growth for a decade.
It will be interesting to see what China does after the recent default of the 11 Chaori bond. Will China decide to use reform and prevent a potentially crippling crisis or does China believe that the recent default of the 11 Chaori bond is not a sign of what is to come in the future?
http://finance.yahoo.com/news/economist-warns-chinas-bear-stearns-213128210.html
http://www.businessinsider.com/china-to-see-first-onshore-bond-default-2014-3
2 Comments
I hope this situation is not exacerbated further to the point that a “Lehman Crisis” will occur. This could definitely be a huge harbinger of the problems which are to come, but with all the current changes, these type of situations are likely to come about. China needs to work with past history and experiences other have faced rather than maintain a obstinate demeanor along the lines of nothing similar will happen to them. They must be prudent and circumspect when issues are engendered of this magnitude and look to appease them before the flood gates are opened.
Lehman’s collapse was a shock for two reasons. One is that it was the result of a major recession that caused many assets to lose value, but would have been a recession even without the financial spillover. Second, Lehman was large and interconnected, with huge amounts of credit default swaps and other potentially toxic assets held by … well, thanks to the lack of regulation and attendant data collection, no one knew. (It turned out such fears were all too well-grounded.) So banks ceased lending to each other. We can very close to having banks refusing to honor the credit cards issue by other banks, which would have triggered a much, much worse recession than what the US experienced.
So does China have a big private bond market? No. Does it have lots of banks with derivates up their xxxx? No. There are LGFVs (look that up!) so I’m not Alfred E Neuman. Most consumers however do not have debt, houses are paid for in cash, and most consumers have their assets in banks that are fully or partially owned by the central government. That too diminishes potential spillovers.
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