Beijing is big on keeping up appearances. Anything to project a positive image to the rest of the world.
As many a Chinese reporter learned in the aftermath of 2015’s epic summer equity market meltdown, anyone who even suggests that things might be falling apart is subject to arrest, imprisonment, or worse at the hands of the Politburo.
Fortunately I’m not reporting from China and as such I’m free to point out that no matter how hard you try to suppress default rates by restructuring loans and/or shifting sour assets to off-balance-sheet vehicles, the charade can only last so long.
With that, I bring you a chart of Chinese onshore defaults with a bit of color from Goldman.
Since the first China domestic bond default in July 2014, the pattern of defaults has followed a stop-start path, with defaults oscillating between periods of zero defaults and periods of rising stresses. To us, this stop-start pattern reflects policymakers’ ability to switch into forbearance mode when rising defaults threaten to result in financial instability.