Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is China’s Economy About to Crash?

Economics / China Economy Mar 16, 2014 - 06:02 PM GMT

By: Investment_U

Economics

Sean Brodrick writes: My newsfeed is buzzing with panicky stories on China's economy. Professional worrywarts are terrified that the country's first corporate bond default (by a little-known Chinese solar company ) is just a taste of an economic earthquake to come - one that could shake the global financial system to its foundations.

China's corporate bonds had always been backstopped by the government, so when Shanghai Chaori Solar Energy & Science Technology missed a $12.7 million interest payment on a bond, people panicked.


Some of the more nervous types fear this is China's "Bear Sterns" moment.

And more bad news followed...

  • A few days after the Shanghai Chaori default, a second company, Baoding Tianwei Baobian Electric Co., saw its bonds suspended from trading and its shares fall by the daily limit.

  • Meanwhile, China's exports tumbled in February, falling 18%. This shocked economists who expected a 5% increase, following a 10.6% expansion in January.
  • For the first two months of the year, China's exports have had their worst showing in five years.
  • China also posted a rare trade deficit last month of $23 billion.
  • And its stock market dropped to an eight-month low.

All this bad news triggered collateral damage in the commodity markets. Copper, iron and soybean prices all plunged.

So, you can see why some people are scared. Now, let me tell you why they're wrong.

More Defaults Possible

What scared the market the most was the default of the solar company. It's true that China is the No. 1 risk to the global economy. And the "bird's nest" financial integration of many Chinese companies and assets can be a reason for worry.

Sure, a $14.7 million default is tiny in a $9.4 trillion economy. (And Baoding, the second company in financial straits, is government-owned, so it's not likely to default.)

But could there be more to come? It's possible. A Thomson Reuters analysis of 945 Chinese companies showed total debt soared by more than 260% to 4.74 trillion yuan ($777.3 billion) in the last five years.

Speaking at a meeting of the National People's Congress, China's Premier, Li Keqiang, warned that "we are reluctant to see defaults of financial products, but some cases are hard to avoid." At the same time, he said that the economy faces "severe challenges" in 2014.

So the 64,000-yuan question: Is Chaori the "Bear Sterns" of China? Could its default lead to a much bigger crisis?

I'd bet you dollars to Chinese dumplings that it won't.

Here's the thing about a managed economy: If government bureaucrats have to stand on street corners and hand out bags of cash to hit their economic target, that's what they'll do.

And they can hand out bags of cash if they want to. China's inflation rate is glacial.

The Chinese government said during its recent annual meeting that it was targeting a growth rate of roughly 7.5% in 2014 (down from 7.7% in 2013).

As for the plunging of copper and iron prices, it's not at all surprising. The metals are used as collateral for many companies that can't get conventional bank loans.

This is what's called the "shadow banking system."

When Chaori defaulted, it raised the specter of more defaults going forward. If that occurs, a lot of lenders may sell their copper and iron to raise cash.

And speculators sold in anticipation of such a move, thus making it a self-fulfilling prophecy. Prices plunged because of fear, not because there's an actual crisis underway.

A Changing Economy

And the scary export numbers? First, you can't read too much into China's trade data, which is always murky because of the timing of its New Year.

But it's worth noting that China is intentionally shifting from an export-driven economy to one driven by consumption. That isn't easy to do, and that's part of the reason why we see scary export numbers.

The government is already planning to cut production capacity of 27 million metric tons of steel, 42 million metric tons of cement and 35 million standard containers of plate glass this year.

These are fundamentals for lower commodity prices. But certainly not for an economic crash in China.

Good investing,

Sean Brodrick

Source: http://www.investmentu.com/article/detail/35888/is-chinas-economy-about-to-crash

http://www.investmentu.com

Copyright © 1999 - 2014 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in