In a shocking admission Chinese Premier Li Keqiang warned lenders in the country to prepare for a wave of defaults on debt in the coming year. China had so far been able to prevent embarrassing defaults among its corporations, even by presumably bailing out the world’s largest bank earlier this year (no one knows exactly what happened here but common sense would point to a hidden government bailout). But the government couldn’t, or wouldn’t, act fast enough to save Shanghai Chaori Solar Energy last week. It’s a signal from the Communist Party that Beijing is getting out of the bailout business. Borrowers, lenders and investors should take heed. Phillip Inman reports that the Middle Kingdom is facing serious challenges.
Li’s warning followed the failure of Shanghai Chaori Solar Energy to make a payment on a 1bn yuan (£118m) bond last week. The default was the first of its kind for China and widely seen as pointing to the end of 11th-hour government bailouts for troubled enterprises.
Some analysts said the decision to let some indebted firms collapse was a sign the authorities had learned from the Japanese boom and bust experience of the late 1980s and early 1990s. Tokyo was plunged into two “lost” decades of stagnation after it prevented zombie companies from declaring bankruptcy – even blocking petitions from bondholders in the courts – when a property collapse exposed debts many times the value of their businesses.
However, figures this week revealed that Beijing is copying the Japanese tactic of ramping up public infrastructure spending to replace the steep slowdown in private sector investment. Fixed asset investment, a measure of government spending on infrastructure, expanded 17.9% during the first two months of 2014, the National Bureau of Statistics said.
If China’s economic troubles force it to reduce purchases of U.S. treasury securities, and the Fed continues to taper its own purchases, there’s no telling what could happen to interest rates. There could be serious risks to America’s ability to fund itself. You can find our advice on profiting from the risks and opportunities of such shocks in our premium strategy reports, Richard C. Young’s Intelligence Report and Young Research’s Global Investment Strategy.