Monday 27 January 2014

"Mega" default in China? (2)

It looks like, at least for the time being, the danger of a possible default that would have roiled the Chinese financial markets is over. However, there is still the case of setting a precedent and of "moral hazard".

The article is from Bloomberg:

China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.

The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.

“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.

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