China – has the “domino effect” begun?

Speaking at his annual address to parliament, premier Li Keqiang said “we are at a critical juncture where our path upwards is very steep… deep-seated problems are surfacing; painful structural adjustments need to be made”.This comes at a time when there are reports of a potential sub-prime debt crisis in the “shadow banking” sector (worth between $604bn - $3.7 trillion, depending on the source). Also, according to the Ministry of Human Resources, the number of job openings fell, with city jobs in Q4 falling 13.7% from the preceding quarter.Finally, and perhaps most importantly, the first domestic corporate bond default happened last week. Energy company Shanghai Chaori Solar failed on a £9m interest payment. The state has previously bailed out Chaori and other such businesses, but chose not to this time, generating much speculation from analysts.Many say it was a necessary move from the government to install a better risk culture, tackle China’s credit problems and starting with the “painful adjustments” necessary to decelerate growth.However, Bank of America Merrill Lynch stated “We doubt that the financial system in China will experience a liquidity crunch immediately because of this default, but we think the chain reaction will probably start.”This was echoed by Philip Li of China’s International Credit Rating, calling it “a domino effect”, and coupled with Robert Peston’s recent BBC article (and other sources below), should help students construct a strong case that the risks of operating in China now outweigh the rewards.The Sunday Times - China faces it's Shadow BanksBusiness Week - How Chaori will deal with the defaultForbes - Trouble for China?The Telegraph - The value of the shadow banksBBC - Is the shadow banking sector due to fall?BBC - Robert Peston's How China fooled the world