China’s Non-Bailout Could Strengthen China’s Financial Structure
March 28, 2014 Leave a comment
China has finally, for the first time ever, allowed an onshore company to default on a bond payment rather than bailing it out. China, still struggling with the fallout of a credit boom that began back in 2008 from stimulus packages, has slowly begun to allow small, commonly privately owned, businesses to default on their debts.
The reason behind this, says China’s premier Li Keqiang, is to address the issue of “moral hazard” in the economy. While he says the government is taking steps to ensure it doesn’t pose a threat to a broader financial structure, many analysts are concerned it might prompt a “Lehman moment” and cause investor panic.
With China likely to see a series of defaults as its government accelerates financial deregulation, the government hopes to take steps to ensure they do endanger wider financial systems.
Many rating agencies have given their opinions on what this could mean for China’s economy. Moody’s CEO Raymond McDaniel and his team have given their two cents: “People believe that if you let a LGFV [local government financing vehicle] default, there could be a chain reaction,” said Ivan Chung, a credit officer with Moody’s. “So they believe the government will do something and not let them go under at this moment.”
With the clear indication from China that they will indeed let some business go under, some are saying the perception of the financial sector is strengthened, not hindered, by such decisions. With the world economic collapse in 2008 still firmly in most investors minds of the United States’ “too big to fail” bailouts happening at taxpayer expense, many believe the knowledge that such a bailout won’t ever happen again can bolster confidence in the government and in turn, its financial sector. Banking practices having become much more secure with the understanding that the US government will not allow such bailout to happen again.