Biggest Casualty of China's Credit Crisis So Far
The biggest reported casualty of China's credit crisis provides us with a good example of a fundamental and ongoing problem that won't go away anytime soon:
(You can catch the video HERE.)
We're let to believe that the Chinese government by "allowing" this default, is promoting free markets. Perhaps. But let's look at this default in the context of the Chinese credit credit crisis we discussed yesterday.
The key phrase, "default on its U.S. currency debt" reveals the problem. As the US dollar strengthens, debt denominated in US dollars becomes harder to service. The interest payments, denominated in US dollars may be fixed, but the foreign entities that hold this debt must come up with more money to meet these payments. The reason is that their revenue, used to finance the debt, is paid to them in the currency of the country - in this case China - where they do business. But as the US dollar increases in value, that revenue buys fewer and fewer US dollars. So the debt payments take up a greater and greater proportion of that revenue.
It looks like this developer hit the wall. Revenue can't meet expenses, which include their US dollar interest payments. Now they've defaulted.
First of all, we suspect this will be the first of a series of defaults. Over a trillion dollars of US dollar denominated debt is floating around out there, much of it in Asia. All of the entities owing interest payments now face the same problem: more and more of their revenue will be required to pay their interest obligations. So unless the economies in Asia begin to grow fast enough, resulting in growing revenue for the entities sufficient to pay for the increased cost of the US dollar-based debt, the big squeeze will continue, which brings us to our second point.
The problem for Asian companies and governments who hold US dollar denominated debt is and will continue to be that growth has been and will continue to be elusive. The reasons are twofold: First, these countries rely on exports and the world's economies are slowing, not growing, so demand for their exports has weakened; second, most of these countries export commodities and the prices of most commodities have been in a swoon, which dramatically reduces what they make on their exports.
With that one-two punch forming a trend that looks like it will continue for the foreseeable future, not just China but all Asian economies face the prospect of at best weak growth, at worst serious declines in economic growth, with the latter more likely. And so the default of Kaisa Group signals things to come. Asian countries will struggle to pay their debts. How many defaults result we'll have to wait on. In the midst of all this, it's hard to see how or when China's credit crisis will ease. Tough times lie ahead.
Kaisa Group Holdings Ltd. became China’s first developer to default on its U.S. currency debt after failing to honor missed payments on two dollar bonds.As if on cue, this headline appeared yesterday on Bloomberg Business:
Are Defaults a Sign That China is Maturing?
(You can catch the video HERE.)
We're let to believe that the Chinese government by "allowing" this default, is promoting free markets. Perhaps. But let's look at this default in the context of the Chinese credit credit crisis we discussed yesterday.
The key phrase, "default on its U.S. currency debt" reveals the problem. As the US dollar strengthens, debt denominated in US dollars becomes harder to service. The interest payments, denominated in US dollars may be fixed, but the foreign entities that hold this debt must come up with more money to meet these payments. The reason is that their revenue, used to finance the debt, is paid to them in the currency of the country - in this case China - where they do business. But as the US dollar increases in value, that revenue buys fewer and fewer US dollars. So the debt payments take up a greater and greater proportion of that revenue.
It looks like this developer hit the wall. Revenue can't meet expenses, which include their US dollar interest payments. Now they've defaulted.
First of all, we suspect this will be the first of a series of defaults. Over a trillion dollars of US dollar denominated debt is floating around out there, much of it in Asia. All of the entities owing interest payments now face the same problem: more and more of their revenue will be required to pay their interest obligations. So unless the economies in Asia begin to grow fast enough, resulting in growing revenue for the entities sufficient to pay for the increased cost of the US dollar-based debt, the big squeeze will continue, which brings us to our second point.
The problem for Asian companies and governments who hold US dollar denominated debt is and will continue to be that growth has been and will continue to be elusive. The reasons are twofold: First, these countries rely on exports and the world's economies are slowing, not growing, so demand for their exports has weakened; second, most of these countries export commodities and the prices of most commodities have been in a swoon, which dramatically reduces what they make on their exports.
With that one-two punch forming a trend that looks like it will continue for the foreseeable future, not just China but all Asian economies face the prospect of at best weak growth, at worst serious declines in economic growth, with the latter more likely. And so the default of Kaisa Group signals things to come. Asian countries will struggle to pay their debts. How many defaults result we'll have to wait on. In the midst of all this, it's hard to see how or when China's credit crisis will ease. Tough times lie ahead.
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