There are a lot of reasons why global investors should keep a close eye on China when monitoring the overall health of the world financial market. First, China has acted as a financial safe harbor when US and European markets hit a snag. In 2009, right at the wake of the Financial Crisis, China’s stability provided investors a safe haven to shelter some of their gains. Also, China’s continued economic growth during the 2008 to 2009 period provided much needed demand to stabilize commodity markets. Not to mention, China is the US’ number one creditor. These are precisely the reasons why global investors are nervously eyeing China lately.
China is set to miss its GDP growth forecast for the first time in over years. Moreover, China’s huge housing glut is looking very much like a bubble that’s about to burst. This should cause alarm bells. The recent $23 million interest default of Chinese developer Kaisa gives clear clues to what’s ahead for global markets in the event the Chinese property market craters.
Thanks to the fluidity and open borders of global financial markets as well as the greater risk appetites made possible by the US Federal Reserve’s quantitative easing rounds, more and more American and international investment houses own bonds issued by Chinese real estate firms. If these default, overseas bondholders are last in line to get asset distributions thanks to Chinese law that prioritizes local bondholders. While Kaisa is relatively small (it is worth no more than $3 billion), you only need to multiply Kaisa’s case with the number of Chinese real estate companies issuing bonds. Given the Chinese real estate market’s declining prices and zooming property volume, all signals point to a rocky real estate market. All those bond defaults can send ripples throughout the whole global financial industry. Consider yourself warned.