China has been wobbly since the summer of 2015. (Fundamentally long before that, but 2015 was acutely painful.) The Communist Party was able to throw a bandaid on things but the underpinnings of the Chinese economy, the Ultimate Crony Capitalist State, are cracking at the moment with a little more snap. One gets the sense that the Party knows how bad it could be and is racing against time.
But does the world know?
Anxiety has been increasing all year, as President Xi Jinping takes a tougher line on financial risk. Regulators have suppressed techniques abused by speculators, such as short-term borrowings using bond-repurchase agreements and so-called negotiable certificates of deposit. This crackdown, combined with expectations of higher rates, had pushed up benchmark yields without much panic until this week…
…If the local rout turns into a full-on crash, that could create problems for these markets. Borrowers, seeing rates spike at home, would naturally seek to borrow more in foreign currencies. But they might struggle to find investors: most investors in Chinese dollar bonds are also from the People’s Republic. If stress is sustained, weaker issuers will struggle to borrow in any currency, and start defaulting on offshore obligations first. That would be a far bigger headache than 2015.
And 2015 was a serious headache for China. (And dependent countries like Brazil.)