News of this Chinese real estate company’s default today is now the third big volatility event in as many days, and it’s not the direction of these incidents that is worrisome to MoneyShow’s Jim Jubak, it’s the frequency.
The default today, April 20, of Chinese real estate company Kaisa Group Holdings, is a big deal for two reasons.
Not, mind you, because it was unexpected or undeserved. The company’s struggle to pay 65 billion yuan ($10.5 billion) in debt has been known now since last year when the government stepped in to block real estate transactions in Shenzhen, the company’s home town, as part of the national crackdown on corruption.
The default—the first ever in China’s real estate sector—is a big deal, first, because it’s the third big volatility event of the last three days in China. On Friday, regulators sent the Hong Kong futures market plunging when they announced—after the end of regular trading in Shanghai and Hong Kong—that they were slapping on new restrictions to limit margin loans, which had soared to a new record as everyone and their Aunt Mai rushed to open brokerage accounts and to borrow money to bet on a soaring Shanghai market. Then on Sunday, April 19, the People’s Bank of China announced that it was cutting the required reserve ratio by a full percentage point to 18.5%. That would free up $194 billion in cash for new loans by banks. And now, today, the news of the Kaisa Group default.
In The Importance of Being Earnest, Oscar Wilde notes that “To lose one parent may be regarded as a misfortune; to lose both looks like carelessness.” In the case of China, a big downward volatility news event followed by a big upward volatility new event seems like, well, emerging market volatility as usual. When that’s followed by a third big volatility event, it’s time to worry if China’s efforts to slow its economy—but not by too much—while shifting the mix in its economy toward consumer spending—while expanding the benefits of economic growth to its large migrant workforce—might be a case of trying to do so much that the market and economy are now subject to an increasing volatility of volatility. It’s not the direction of these volatility events that worries me; it’s the frequency of them. So many in such a short time span suggests that the market and economy have started to wobble.
The second reason that the Kaisa Group default is big deal is because it involves dollar-denominated debt. The International Monetary Fund—and voices on Wall Street—have flagged the huge amount of recent borrowing by companies in developing economies—that’s denominated in dollars—as a danger to the global economy. Slowing economic growth, especially in commodity focused developing economies such as Brazil and Nigeria, made paying back those loans a challenge. But an appreciating dollar, which makes it more expensive to pay back a loan for a company that recorded its revenue in real or pesos, or rupiah, threatens to turn a challenge into a source of a significant number of defaults. In this context, the Kaisa Group default isn’t a China problem but a global problem for developing economies.
In which case, it’s not just China’s economy that could be showing an increased tendency to wobble.
