After years of incredible growth, China’s credit-fuelled economy is slowing down.
And with that has come, for the first time in Chinese history, domestic corporate bond defaults.
Shanghai Chaori Solar Energy Science and Technology Company recently missed an interest payment. Some analysts argued a default would give Chinese markets clarity on how to price these products in the future.
Last night, markets in Asia were rocked by more bad news on Chinese bonds. The bond of Baoding Tianwei Baobian Electric Co. was suspended from trading, according to BAML’s Ting Lu.
For Lu, the question is whether or not this is the kind of moment that could turn into a full-blown crisis.
“For some investors who have already been deeply worried about ‘Bear Stearns Moment’ or an imminent ‘Lehman Moment,’ this could be perceived as another snowflake to trigger an avalanche,” Lu wrote clients. “Whether the TBE bond will default is unclear.”
“We do see a significant rise in bond and trust loan defaults, but we see little chance of systemic credit crunch and growth hard landing,” he writes. “We expect quite volatile financial markets this year, but we also believe misperceptions in the markets could also provide opportunities.”
Lu outlines why this probably won’t be the big igniting-of-the-powder-keg moment some market-watchers fear. From the note:
(1) Let’s not underestimate Chinese onshore investors’ resilience; (2) Defaults of bonds and trust products are not on a similar scale to a collapse of a major financial institution which is intertwined with many other institutions; (3) The Chinese government, with its massive savings and control, still has a deep pocket to at least prevent systemic credit squeeze; (4) The Chinese economy, thanks to its huge savings, has a below 70% loan-to-deposit ratio, US$4.0tn FX reserves, and a very small amount of foreign debt. Like all other economies, the Chinese economy has its own ups and downs, but we think the chance for China to face a severe downturn and financial crisis is rather small.
“We actually think some defaults of corporate bonds and trust products a good thing as a normal economy needs those defaults to better price bonds and other debt products,” Lu concludes.
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