China Has a Problem

When the U.S. markets are healthy, overseas concerns often get overlooked. You have seen headlines about China recently, but may not have taken the time to click-through. From CNNMoney:

It starts with an epic credit binge. When the global financial crisis hit in 2008, the Chinese government ordered the credit lines open. Banks and other lenders responded, funding massive building and infrastructure projects. The strategy worked, and China emerged relatively unscathed from the global financial crisis. But credit growth never really slowed down. Analysts now worry that new credit is no longer generating strong economic returns. And, worse, the ballooning borrowing could sap growth if the central government is forced to stand behind defaulting local governments or agencies, through which much of the lending flowed.

[Hear More: Chinese Property Bubble May Collapse in a Year or Two]

Default Fears Are Increasing in China

Charlene Chu covered China for Fitch Ratings over the past eight years. In a recent interview, she answered the “why should we care?” question. From The Wall Street Journal:

WSJ: What do you make of the concern over the possibility that a 3 billion-yuan set of trust products sold by ICBC might default at the end of the month?

Ms. Chu: The reason why this matters is we’ve never been in an environment in China where defaults are allowed to happen, whether in the bond market or trust sector or other parts of the financial sector. It could be interpreted as a new willingness by authorities to start to allow things to default. The question after that is how far they are willing to go, because there are many questionable exposures out there. Over the last couple of years there were lots of stories about corporates about to default on domestic bonds, but it never happens in the end.

Stock Investors in the U.S. Could Be Impacted

….read more and view 3 telling charts HERE