Taylor China Weekly March 7, 2014


The question of how government economic reform will play out will certainly be an ongoing debate. There are the naysayers that say that the hugely debt perpetuated economic growth will eventually unravel and end in a severe economic downturn.

However, the Chinese communist government is still very powerful and very much in control. Unlike, other “free” economies, they still have the ability to counter balance destabilizing movements. Whoever said that transformation from an emerging economy to an economic leader would be smooth sailing.

The first ever, corporate bond default in China is nearly upon us. A solar cell maker, Shanghai Chaori Solar Energy, has announced that it will not be able to make an annual interest payment of Rmb89.8 million ($14.6 million) on bonds that it issued two years ago. Although this announcement should not be terribly unexpected, as the bond issue carries a CCC junk bond rating and trading was suspended last July.

Given the significant level of debt issuance from 2008 to 2013, which Standard and Poor’s estimates is around $12 trillion at year end 2013, defaults on riskier credits would be expected.

As us European high yield bond veterans recall back in the late 1990s, unsophisticated investors, such as the Italians of the day, just picked the names with the highest yields. Needless to say, it all went very badly for them when those risky, start up telecom issuers started to falter. An analyst at Moody’s claims the same is happening in the Chinese corporate bond market today. However, the difference here is that investors expect the Chinese government or other third parties to bail out the issuers in the end. Perhaps that will continue…

Buried somewhere in all the noise about the “slowing” Chinese economy, albeit the growth target for 2014 is still at 7.5 per cent, is the detail that the government must create enough jobs for 7.3 million university students graduating this year. Of course this number does not even include those students who are studying abroad and looking to return home after graduation. If only our government had an inclination to create new jobs for our college graduates.