While the Russia / Ukraine conflict is far from over it has at least stabilized and that seems to have calmed markets. But not so fast. Here comes China...again. The Wall Street Journal is reporting that Chinese leaders are concerned they won’t hit their economic growth target of 7.5%. Add to that the issue of Shanghai Chaori Solar Energy Science and Technology Company. They have announced they will be unable to pay 89.8 million renminbi worth of interest on their 1 billion renminbi bond due this Friday. It marks the first time a Chinese company will default on its debt.
So is the sky falling or is this just what we’ve come to expect out of China?
With respect to the Shanghai Chaori Solar debt issue, Yahoo Finance Editor-in-chief Aaron Task says, “We know that [China has] had a massive binge of borrowing in that country, debt levels are getting out of control, what’s on the bank balance sheet nobody knows, and this could be the first string that you pull on and the whole thing unravels.”
As for hitting economic growth estimates Task says, “The People’s Bank of China will do anything and everything to hold it together to keep growth going where they need it to be which is at least 7.5%. They’re saying ‘we may need to loosen up credit to do that’ already and yes, if there’s any kind of problem with the banking system they’ll print a lot of renminbi.”
China has it slightly easier than say the U.S. Federal Reserve. The People’s Bank of China is not trying to separate itself from the government. It is unabashedly an arm of the Chinese government machinery. So if the country’s leaders say we need more cash, they print more cash. No questions asked.
But what happens in China doesn't stay in China. “You’re already seeing the impact on some of the other economies in Asia,” Task points out, “because their imports into China have slowed and that has hurt their growth.”
Any contagion in the Chinese economy would not stay contained to Asian trading partners. The size and scope of the country make it a foregone conclusion that it will end up impacting the United States too. As Task told Breakout, "China is morphing into a true consumer nation and as they do it will begin to impact other manufacturing economies like ours."
So as they deal with troubles like corporate bond defaults and economic targets it’s worth keeping an eye on here in the states. The key question now is whether these problems are growing pains or the beginning of something more nefarious.