Turmoil in Chinese market

Last week in China, Shanghai Chaori Solar Energy Science & Technology Co. Ltd-one of the Chinese solar company confessed its inability to repay $14.6 million interest to the investors. This happened to be the first corporate bond default that occurred in the China mainland.

This time, the government and state-owned banks gave up their previous policy of bailouts and debt extension to ease defaults. According to the article on WSJ, the absence of actual defaults is leading to more risky lending practices and could cause more wasteful investments in industries that have already suffered overcapacity. To put restrictions on the shadow banking system in China, it is necessary for the government to stop supporting unregulated risky investment activities and lay the economy on the right track.

Yesterday, copper prices skidded to their lowest level since June 2010, also the prices of iron ore fell to its lowest level on Monday since 2012. This is because of several reasons.

First, the default last week brought down the faith of Chinese economy, some investors may expect more defaults after this first one.

Second, the slack of the growth speed of GDP leaded to the worries about the decline in demand of copper and iron. Mostly consumed by China each year, copper and iron prices are bellwethers of the Chinese economy.

Third, the pressure on the copper financing forced selloff of copper. Regulated by the strict lending standard, many companies used copper as collateral to get funding and use that either to import more copper or invest in high-earning assets. However, the fear of default and curb of demand transfer those copper from collateral into market, then the raise of supply pull the copper price down.

Those unwanted extra metal in the market has leaded to more worries about the large commodity such as oil. Brent crude for April delivery on London’s ICE Futures exchange was down 69 cents, or 0.6%, at $107.86 a barrel. On the New York Mercantile Exchange, light, sweet crude futures for delivery in April were down $1.40, or 1.4%, at $98.63 a barrel. This is because that China is the main force in emerging market countries that were hoped to increase demand for oil, according to the recent report from OPEC. On the contrary, gold price rose to a five-month high today due to the investor’s increasing demand for safe assets.

As approaching to the burst of the bubble in Chinese house market, those news showed that the government is starting its regulation over the unhealthy economy. In the short run, we may experience more turmoil in Chinese economy.

2 thoughts on “Turmoil in Chinese market

  1. Emma Zhang

    I agree that there will be more turmoil in Chinese market this year as the government unwind economy reform. In the long run, stop bailout and debt extension will enable banks to improve efficiency in utilizing assets. But the government should be cautious not to trigger a larger scale financial crisis while they carry out the policy.

  2. viczhou

    The first corporate bond default is definitely an alarm for China’s rapidly growing credit market. Indeed, the government has to impose stricter regulations on lending so as to enhance credit quality and financial stability, otherwise massive defaults, especially those associated with the housing market, could blow down the overall economy,

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