Last week the default of Shanghai Chaori Solar on its bonds was the first in the Chinese domestic market.
While only a small default — around US$ 163 million — it raised fears of China facing it’s very own Bear Stearns, or even worse, Lehman moment.
So as the Peoples Congress wraps up, news that Premier Li said yesterday that further defaults on bonds and other financial products were unavoidable has spooked the markets overnight. And in Asia today, where the Nikkei is down 2.5% and the ASX has fallen 1.3%.
The Financial Times, which is running this story as a lead on the Front Page of its Friday Edition in the UK, reports: “Li Keqiang said on Thursday that China was likely to see a series of defaults as the government accelerates financial deregulation, although he added the government would take steps to ensure they do not pose a threat to the wider financial system.”
We have been paying great attention to risks from financial sectors and debt,” Mr Li said on Thursday at his annual press conference in response to a question from the Financial Times. “We must enhance oversight and solve problems in a timely way to ensure no systemic and regional risks.
But trying to control risks when globalisation and global banking lead to intertwining of banks and industry across borders is going to be difficult.
Already this week’s iron ore crash (it has since recovered somewhat) was caused by Chinese banks calling in loans from steel producers after the collapse of Haixan, according to ANZ’s Head of Commodity Strategy Mark Pervan. This in itself was worrying enough for the Australian budget, and shares in miners around the world as investors re-rated growth in the worlds second biggest economy.
The impact on traders expectations about Chinese and global growth has been a significant one with front month copper under $3 lb for the first time in 3 years overnight and Nymex Crude back below $100 a barrel even though tension in the Ukraine remains high in the run up to the Crimean referendum this weekend.
Premier Li doesn’t want to cause market ructions as he made clear but his comments have reconfirmed the reformist zeal that he and President Xi Jinping are showing in their efforts to reform and stabilise the Chinese economy over the long run.
It has markets spooked.
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