CHINA: FIRST DEFAULT IN ASIAN COUNTRY?

China would start the first default and give a hard lesson to the financial system

The financial system in China has begun to

suffer the changes proposed by the
government to initiate a cycle of "cleansing",
through the expansion of a series of structural
reforms. These reforms may involve the first
major default of the Asian giant and could
infect an important part of the global financial
system.
The issue involves an investment of 3 billion
yuan (500 million dollars) of a coal miner
industry that disappeared after environmental
reforms of the Chinese government. The
company borrowed money at a time when the
coal industry was strongly affected by Beijing's
efforts to reduce pollution levels across the
country. The investment product was managed
by China Credit Trust Company and marketed
by banks offering an annual return of 10
percent while the value of the assets was
fading.
The shadow banking
Since the outbreak of the crisis, the shadow
banking has offered loans to companies or
individuals who have trouble getting traditional
bank financing. These loans are packaged and
sold in packages to investors seeking higher
returns, without thinking about the risks (since
the 90s prevails in banking the idea that there

is no risk because governments will always to

the rescue). In the case of China, the
investment reached high levels of money and
although no official data (most of these
operations are performed in total opacity)
estimates that its size can reach 60 percent of
PBI in China.
What's happened? Due to changes in China to
reduce pollution levels, mining companies have
leveraged loans exceeded.
Why it happened? The shadow banking has
offered loans to companies that have trouble getting
traditional bank financing.

What are the consequences? A possible first

default in China, calling into question the soundness
of financial system and could generate distrust in
international markets.
Already expired payment of $ 500 million and
the Chinese government has indicated that not
will be involved in the rescue of the
company. This would be the first time that
China starring a default and this may mark a
turning point in investment. If the default is
confirmed,
this
could
prove
Beijing's
commitment to allow market forces to play a
more important role in the economy, making
clear to investors that high yield investments
entail a legitimate risk.

The rapid expansion of the shadow banking

has raised concerns in Beijing about the
efficiency of the credit system in general, since
it has reached a scale that can undermine
economic growth and mean for China similar to
Western collapse following the bankruptcy of
Lehman in September 2008. So that a default
could slow the expansion of the shadow
banking has grown in China to unconscionable
levels. Obviously this would generate an initial
panic that could undermine confidence and a
negative impact in the short term for the
financial sector and the reputation of the
Chinese financial system. The threat of a
default in China questions the soundness of its
financial system.
However, it would be a positive action for the
healthy development of the financial system in
the long term, and would also be a good
opportunity to educate investors and debug the
market. Since
the
Lehman
bankruptcy,
governments have rescued the financial
system sprees without taking into account that
this has meant the suffocation of the real
economy. If China applies a selective default,
no doubt that the West will be encouraged to
replicate the lesson.