In yesterday’s research from economist Ed Yardeni, he discusses the potential threat that a financial meltdown poses for the global economy. While he and we believe the probability of this happening in the near future is low, we do think it is a situation that warrants monitoring.
“Nevertheless, I did consider the possibility that a credit crunch in China might be the event that unravels the global economy, much as the Smoot-Hawley Tariff
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caused the Great Depression of the 1930s. I concluded that this is a possible scenario though highly unlikely anytime soon as long as Chinese authorities continue to flood their economy with liquidity.
The 5.8% mini-correction in the S&P 500 from January 15 through February 3 was partly attributable to reports in the Chinese state media that the “Credit Equals Gold” wealth management product (WMP) was on the verge of default. Instead, it was quickly restructured. But as I discussed yesterday morning, now there are concerns about the technical default of another WMP called “Opulent Blessing.” Apparently, this product has also just been bailed out by creditors who agreed to a restructuring plan, according to a 1/17 FT report.
The WMPs are an important source of funding for the shadow banking system, which provides financing to many of China’s riskier enterprises. If those funds dry up as a result
of a WMP default, Chinese economic growth could slow significantly, and deflation could turn into a widespread problem, triggering more defaults. This may be China’s LTCM moment. If the authorities mismanage the current WMP default crisis, it could turn into China’s Lehman moment.”
