Following China’s first corporate bond default last week, Li Keqiang, Premier of the People’s Republic of China has warned “We are going to confront serious challenges this year and some challenges may be even more complex.”
The lack of a bailout last week is seen as a turning point for China as it decides on a course between civil unrest and moral hazard. To date, it has always bailed out troubled enterprises to prevent civil unrest, but doing so creates a moral hazard. Both enterprises and their investors have – to date – taken ever greater risks knowing if the worst does happen the government will be there to bail them out. The result, culminating with a warning from ratings agency Fitch last year saying China now has the largest credit bubble in modern history.
Speaking after the annual session of the national people’s congress, Li said China must “ensure steady growth, ensure employment, avert inflation and defuse risks”
“So we need to strike a proper balance amidst all these goals and objectives,”
“This is not going to be easy”
Li said we must prepare for a wave of bankruptcies signalling the end of an era when the People’s Bank of China was only a stone throw away and ready with a bailout.
Li’s comments mixed with a raft of pessimistic data out of China has caused a turbulent week on world markets. It started with data from China showing February exports had fallen 18.1 per cent from the year earlier – the most since the global financial crisis. Economists had expected a rise in the vicinity of 7.5 percent and suggest the data could be distorted by the Lunar New Year. China lending data released Monday night show Shadow Bank Lending practically ground to a halt in January & February.
Bloomberg reported on Friday that “China’s default risk has risen beyond that of Ireland, having been on par with France and Japan a year ago”
“Growing concern over looming defaults led to a surge in demand for CDS as investors seek to insure themselves against a credit-default event,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore. “Plans to rein in shadow financing imply that the government can no longer be counted on for a bailout, hence raising the possibility of more defaults.”
The next potential default is speculated to be “Magic” Property with an investment in an office building in Chongging. Arranged by CITIC Trust, it is expected to come due on the 31st March. However, there are reports the local government has intervened, fearing social unrest after a unit buyer committed suicide when he/she could not obtain the title to the property. A report from the Bank of America indicates, “CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.”
» China’s Li Keqiang warns investors to prepare for wave of bankruptcies – The Guardian, 14th March 2014.
» China’s Exports Unexpectedly Drop Blow to Confidence – Bloomberg, 9th March 2014.
» China Bond Risk Exceeds Ireland as Defaults Unavoidable – Bloomberg, 14th March 2014.
» Markets hold breath as China’s shadow banking grinds to a halt – The Telegraph, 10th March 2014.
» China shadow lending slows sharply – Financial Times, 10th March 2014.