A raft of stories across newswire in the last 23 hours suggest there might be a rug-pulling-out of sorts coming for investors in the Far East. And as we know, the Butterfly Effect in globalized markets these days is instant and amplified. It could be suggested at this point that the tech sell-off currently underway in U.S. technology stocks is a result of a growing crisis in confidence toward China, and its economic reporting.
One might even go so far as to suggest that, in some of the events, there are distinct parallels with events preceding the downfall of Lehman Brothers in September 2008. Remember how first there was Bear Stearns, which at time, was as unthinkable to outsiders as was the idea that JP Morgan could fail.
Five years wiser and a hell of alot poorer, we know better than to think anything is truly too big to fail. In fact, what we should be learning right about now is that the much older saw “The bigger they come, the harder they fall” is far more realistic than the recently (Federal Reserve?) coined phrase ‘too big to fail.
But, before the tangent just penned completely derails the train of fragile thought, back to the point. Here are, in no particular order, a summary of the headlines that point to a potential seismic event in Asian financial markets, with aftershocks expected in North American and Europe shortly thereafter:
1. In the New York Times, Yasheng Huang, a professor of management at MIT, and author of “Capitalism with Chinese Characteristics” states that China is probably not in danger of a Lehman Brothers style cascading failure to remain solvent, thanks most to the fact the banks are state-owned. That means they “carry the strong implicit guarantees from the government and that they are not under pressure to mark their asset values to market on a real-time basis.
He does, however, go on to suggest that the idea that “China could also grow merrily as if all the ghost cities and bridges to nowhere had no consequences” is not tenable, and warns of impending consequences from the huge amounts of bad debt about to unravel.
2. In the Washington Post, David Ignatius writes “the China Index Academy noted that real estate sales during the first quarter of this year in China’s four biggest cities were more than 40 percent below the levels of a year ago.”
3. CNN reports that there is “no denying the slowing trend — China recorded GDP growth of 7.7% in the last two years, versus 9.3% in 2011 and 10.5% in 2010.”
4. In the Japan Times, former Morgan Stanley economist Andy Xie is predicting a “collapse in China’s property and stock markets”. “It’s going to be big, it’s going to be historic, and probably going to be this year,” said Gordon Chang, a Chinese-American lawyer and columnist who has been predicting a crash in China for the past 15 years or so.”
5. Bloomberg BusinessWeek reported in mid-March on the collapse of major real estate developer Zhejiang Xingrun Real Estate Co. According to the story, Government officials familiar with the matter said yesterday that closely-held Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The housing market in the world’s second-biggest economy is cooling with the value of home sales falling 5 percent in the first two months of the year after local governments stepped up measures to curb rising prices.”
“Looking at the second quarter, we think the worst of credit risk is far from over,” CICC bond analysts Ji Jiangfan, Zhang Li, Xu Yan and Wang Zhifei said. “Lower-rated bonds’ credit premiums may stay at high levels or rise to new highs.”
6. Bloomberg News outlined the sudden drop in Chinese exports in the month of March, citing a 6.6 percent drop from the same period a year ago, driving a trade surplus of US$7.71 billion, and factory output was seen contracting for a third month in a row, according to an HSBC Holdings Plc and Markit Economics gauge.
If one were to adopt a holistic view of the noise coming out of China, the conclusion would have to be that China, and everyone who has money tied up there, are in denial. It would appear that China’s soft landing is accelerating toward a harder one.
