Will the Chinese Bond Market Start Seeing Defaults?
China is finally reaching its own “Bear Stearns moment,” and will likely see defaults in the short term. The $1.4 trillion Chinese bond market could see its first default soon, as solar manufacturer Chaori Solar warned this week that they will not be able to make their anticipated interest payments. Solar companies aren’t the same thing (economically speaking) as companies like Bear Stearns, but this will be an important first and could be a harbinger of problems to come.
So far, the damage from this news is limited. Chinese stocks are off much more than U.S. stocks as of this writing, but that isn’t very unusual. However, this default is occurring following a significant slow-down in Chinese economic growth. While still considered an “emerging market,” China is also the world’s second largest economy (third if you combine the entire EU), so we might worry that the solar default is a canary in the coal mine. This is definitely be an issue that we will monitor closely.
There are a few ETFs and individual stocks traders may be interested in to capitalize on problems in China. For example puts on the iShares FTSE China 25 ETF (FXI) could rise in value dramatically if the credit market struggles. Bearish traders could also target other Chinese solar stocks in anticipation of the situation cascading out of control or just as a hedge against uncertainty.
For example, Hanwha SolarOne Company (HSOL) has seen a significant decline in its credit situation over the last year.
The Bottom Line for Next Week
Ultimately, the good news seems to be outweighing the bad this week. However, the convergence of external shocks could get worse, as it reminds us of the European debt crisis a couple of years ago that made the stock market shake erratically on a day-to-day basis. While we remain relatively bullish, we expect that volatility will be high in the short term, which means traders need to be patient as they hold their trades and wait for a stronger trend to emerge.