How serious is the Unfolding Chinese Debt Crisis?

“When the wind of change blows, some build walls while others build windmills.”
Li Keqiang, Former Premier of the People’s Republic of China

The backdrop

Things are not exactly going China’s way these days. It has been one glitch after the other more recently. A few weeks ago, Chinese property giant, Evergrande, filed for bankruptcy in the courts of New York, and when the stock started trading again days ago, after having been suspended for 17 months, the price was off almost 90%. All this has happened only a few weeks after Country Garden, another big Chinese property company, missed $22.5 million of bond payments. And, as I sit here and put this note together, news runs across my screen that the $2.9Tn Chinese investment trust industry may also be in trouble – because of defaulting property investments.

That reminds me of a new research paper from JPMorgan saying that it now expects 10% of all Chinese high-yield corporate debt to default this year – up from a previous estimate of 4%. The situation is getting pretty bad in China – in fact, so bad that Chinese state-owned banks have been asked by the government to support a weakening Renminbi. Furthermore, in parts of China, civil servants are having their pay slashed, bus services are being shut down and, to add insult to injury, there is even a proposal on the table to cut pensioners’ medical benefits which, by the way, has led to civil unrest in a number of cities.