The first offshore default for a SOE in 20 years will stoke concerns that China could be consumed by the same debt problems that engulfed Japan in the 1990s. However, it is important to remember: the credit squeeze imposed by the regulators last year was intended, voluntary.
Li Keqiang’s broadside against the PBoC (over record credit expansion in January) reflects the determination of the Xi administration to ‘clean-up’ the financial system. The Chinese premier has railed against excessive lending before. Nevertheless, the clampdown on peer-to-peer lending shows no sign of letting up. The authorities have arrested 62 suspects abroad in the latest crackdown. It is possible that more defaults will be allowed, to send a warning shot across the bows of the PBoC to not reverse last year’s clampdown on shadow lending too quickly.
Indeed, the timing of the default (Qinghai Provincial Investment Group) may not be a coincidence. Progress on trade talks, and a strong rally in the equity market, suggest there will be more to come. The Chinese administration will be keen to resolve the trade dispute. It is much easier to reform the financial system in a rising stock market.
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