Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out.
Now that too big to fail is dead in China, expect more failures, basically.
Beijing controls its banks. If it tells them to lend, they will lend, something the U.S. doesn’t have the power to do. There is zero risk of contagion within China’s borders because that is not a failure mode in a monolithic banking system.
To the degree contagion exists, it is at the sovereign level, in foreign investors decamping from China wholesale. China is less reliant on those than before. And there is no sign of that happening.
About 20%-30% of the sector is now pricing in default.
Yes the local banks matter, but as we just saw, international dollar bonds can and will default these cos
This is tame compared to contagion in market economies. It’s limited to a sector, and it’s limited to their dollar bonds. The banks are unscathed. There is no systemic credit crunch, nor any signs such a thing is imminent.
So if those bonds fails, they won't pull down other sectors or cause cross-party defaults - at least not directly. The potential for a recession in china causing recession elsewhere is non-zero though.
Other than that, yes the pain can in principle be contained to the dollar bond market, but even that price signal is now enough to let people start doing the (pretty ugly) math on if we're talking $100bn or $10tr of losses.
If anyone sees estimates, would love to take a look!
A nation that overproduces manufactured goods but has to import food from foreign nations to feed it's own people and braces with power cuts even it's most industrial areas is in trouble. Put in a toxic debt scenario, reliance on foreign states for energy, worsening foreign relations and a pandemic and you have a recipe for cascading effects. This is the same path that the Soviet Union took and at one time they had taken lead in many areas such as space exploration. The Soviets also had the advantages of energy independence and plentiful natural resources. China has no such advantages and doesn't nearly have the overwhelming global power that the Soviet's did at their height. The Soviet Union could have been described as a global empire something that China hasn't yet achieved.
What makes the impending China collapse worse is the magnitude of debt levels and the impact on the global economy due to China's deep integration with it. They won't just go down but will take all other industrialized nations with them.
There's no government functions in China that have any ability for transparency, accountability or self-criticism. China's current militant "wolf-warrior" stance in world affairs telegraphs it's own insecurity. They internally know they're failing and the risk is increasing but can never admit it or take corrective actions because that would mean admitting their top leadership have made mistakes.
Or alternately, order strategic companies to not fail and in fact be successful.
I'm not saying that's necessarily the best option but with that fine grained control over their economy, plus statistically some of the smartest humans who ever lived on the planet playing on their team, I'd be surprised if China's current power structure doesn't ride this out.
that's a bailout, and that is what the CCP wants to avoid being seen as doing.
Sometimes that’s what you want to do and you trigger a lehman.
No one really knows where the trigger line for systemic with these things is. Hence the weird financial regulations like Dodd-frank in US, MiFID in EU etc
edit: apparently littlestymaar and I are operating on the same wavelength this morning.
Of course one can create two companies, make the first borrow from the second, make the second hide the money and default, get the first bailed out and pocket the hidden stash.
But they'll be easier to go after.
Iif you think of companies as “agents”. But they are not, the agent causing the default is the human in charge. And those aren't often suffering a lot from their mistakes…
I wouldn't be surprised if this would only cover domestic bond owners.