"Mo Mao-ney, Mo Problems"
In January, a wealth product - stemming from China's highly unregulated $8 trillion Shadow Banking Sector - called "Credit Equals Gold #1" (you can't make this up) was bailed out by the government. This action raised concern that the CCP leadership was not serious about systemic reform and would continue to put lipstick on the pig in an effort to avoid a hard landing. News over the past few week suggests otherwise.
Following tough talk and a sector-wide audit, the Shadow Banking sector saw new lending absolutely erased from $160 billion in January to de minimis today. Furthermore, the country witnessed a rare domestic bond failure when solar company Chaori was allowed to default last week to the shock of many.
While the government may be showing some political will in reining in China's enormous credit sector, the consequences of an economic slowdown (soft or hard) are being felt around the globe. Asian markets shivered yesterday on news that Chinese exports were down 18% YoY in February while two Chinese import staples - iron ore and copper - fell by 3.9% and 5%, respectively.
Between the drying up of Shadow credit and diminishing investor confidence, some are warning that the default by Chaori could be China's "Bear Stearns" moment. That it has come to this is no shock, when you consider that the Middle Kingdom created $15 trillion of credit over the past five years. Now, how to unwind this cluster**** while avoiding Lehman 2.0?
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Update: March 14th, 2014 (3.40pm)
Commentary from George Magnus more correctly labels the current Chinese situation as a "Minsky Moment" (as CEO Technician also does) and provides a clear explanation as to why:
- Add an end to the carry trade of raising cheap US dollar finance abroad, and you can see why a lot of people are talking – wrongly – about a Chinese Bear Stearns or Lehmans moment. It’s wrong because the consequences of what is more accurately a Minsky Moment are highly unlikely to compare with the financial implosion that erupted in the West in 2008/09. China’s financial system is state owned and guaranteed, the country is a net creditor with a high savings rate, and it has financial resources-a-plenty with which to recapitalise banks, and finance losses. But – and it’s an important but – there will be a cost in terms of growth, jobs and the pace of development, and poignantly to the whole rebalancing agenda. Someone, after all, has to pay for a banking crisis, and the household sector is the most likely to do so through further reductions in nominal and real interest rates precisely when China’s market aspirations call for the opposite.
