As expected, China's corporate-bond market has suffered its first ever domestic default, with Shanghai Chaori Solar Energy Science & Technology failing to fully pay 89.8M yuan ($14.7M) in interest that was due today.
Until now, China had bailed out distressed companies.
Moody's believes that the default will be a "wake-up call" that will help the growth of China's bond market. It will "signal regulators' higher tolerance for corporate bond defaults amid financial market reforms, which is in line with the current central administration's shift to adopt more market-oriented policies," Moody’s says.
Meanwhile, the Shanghai government has reportedly given authorization for a city-owned investment company to purchase non-performing loans from local banks. The approval follows similar approval by other municipalities and indicates how Shanghai is preparing for an expected rise in bad debt.
The markets reacted calmly to Chaori's default and the Shanghai Composite closed -0.1%.
"Whether GDP growth is to the left or to the right of 7.5%, that is not very important. What is important is job creation," Lou added.
The government aims to create 11M jobs this year.
"This flexibility allows them to flag an encouraging number to the business community but at the same time to feel free not to react with stimulus and more debt if it's missed a bit," says Credit Agricole economist Dariusz Kowalczyk.
China has kept its annual growth target at 7.5% for 2014, allaying the concerns of some but disappointing others that it would lower the goal as part of the government's focus on reforming the economy and trying to rein in ballooning credit.
However, in an address to the annual meeting of the National People's Congress, Chinese Premier Li Keqiang reiterated his commitment to reform to make growth more sustainable. China will cut idle factories and encourage private investment, and it has reduced its target for growth in fixed-asset investment to 17.5%, the slowest in 12 years.
As expected, China is continuing to target inflation of 3.5% and a fiscal deficit of 2.1% of GDP.
The government also intends to wage a "war" on pollution, including by reducing capacity in the steel and cement sectors.
Meanwhile, China's HSBC services PMI rose to 51 in February from 50.7 in January. However, composite PMI slipped into contraction territory with a fall to 49.8 from 50.8. In comparison, official non-manufacturing PMI rose to 55 from 53.4. (PR)
China's HSBC manufacturing PMI fell to a seven-month low of 48.5 (flash 48.3) in February from 49.5 in January. (PR)
In contrast, the official non-manufacturing PMI rose to 55 from 53.4.
The figures come after government data showed that manufacturing PMI slipped 50.2 from 50.5.
"We are seeing a higher share of services in GDP, and we cite that sometimes as one of the signs of rebalancing in the economy," says BBVA economist Stephen Schwartz. "If that's part of a longer-term trend, that's somewhat encouraging."
The readings add to other data that paint a mixed picture of the Chinese economy. The latest numbers are also thought to have been affected by the Chinese Lunar New Year, when production tends to slow down.
China's official manufacturing PMI slipped to an eight-month low of 50.2 in February from 50.5 but topped forecasts of 50.1.
The data adds to flash HSBC PMI that showed that Chinese factory activity softened in February. The final HSBC reading is due out on Monday.
Both sets of figures were probably distorted by the Chinese New Year, so the government remains sanguine. "Based on market demand and the production situation in some sectors, we expect that future economic growth will remain generally stable," the government said.
"The slowdown in manufacturing growth is due to a deceleration in investment, especially of credit-sensitive infrastructure and real-estate investment," says RBS economist Louis Kuijs. "But there's no need to become overly concerned - the government has the policy space it needs to ensure its bottom line on growth this year while retaining financial stability." (PR)
Preparing for a wider trading range for the currency, the PBOC engineered the yuan's recent decline in order to shake out speculators, reports the WSJ, citing sources close to the bank. Among the moves made by the central bank are directing state-owned lenders to buy dollars.
Previous to the recent quick decline, the yuan had been on a steady rise - attracting a flood of money into the country trying to benefit from a one-way bet. The PBOC and the country's banks had to mop up $45B of foreign exchange in December, the 5th consecutive month of net purchases. One-way no longer, the yuan has slipped to its lowest level since last summer.
Analysts expect the PBOC to expand the allowed trading range of the yuan to 2% daily, up from 1% now (it was 0.5% in April 2012).
The move to widen the trading band and perhaps weaken the currency comes, of course, as China's economy is slowing down. "I'm more concerned about foreign demand and my customers' ability to pay me these days," says a businessman in Shenzhen.
The average price of a new home in China rose 9% on year in January, although that represents the first slowdown for a year. December's increase was 9.2%.
The slight deceleration comes amid attempts by the People's Bank to cool the property sector and rein in lending by tightening monetary policy.
Prices increased in 62 out of 70 cities on a monthly basis and dropped slightly in six.
Of China's largest metropolises, Guangzhou's prices gained 18.6%, Shenzhen's 17.8%, Beijing's 15% and Shanghai's 17.5%.
Meanwhile, Finance Minister Lou Jiwei has played down the fall in the yuan and the risks from the shadow banking sector, while PBOC Governor Zhou Xiaochuan has indicated that the economy can sustain growth of 7-8%
The People's Bank of China has drained $7.9B from the country's financial system by selling 48B yuan in repurchase contracts, the first such transaction since June.
The PBOC made the tightening move after weekend data showed that aggregate financing soared to a record 2.58T yuan ($425B) in January from 1.23T yuan in December despite the bank's attempts to rein in lending.
Meanwhile, foreign-direct investment in China climbed 16.1% to $10.76B in January in an indication of continued confidence in the country's economy despite recent cooling,
Separately, the difference in the reported economic output between the national government and China's 31 provinces fell to 10.7% in 2013 from 11% in 2012. The regions' combined output was 62.9T yuan, topping the national figure by a still substantial 6.06T yuan. "Regional authorities are showing more realistic data," says Credit Agricole's Dariusz Kowalczyk. The figures "may reflect the change in emphasis in the assessment of regional authorities away from growth towards other factors, which reduced the incentive for them to inflate the numbers."
The Shanghai Composite ends -0.8%, while a financial index drops 2.1%.
Chinese aggregate financing, the broadest measure of credit, grew to a record 2.58T yuan ($425B) in January from 1.23T yuan in December and topped forecasts of 1.9T yuan.
New local-currency lending soared to 1.32T yuan, the highest level since 2010, from 482.5B yuan in December and vs consensus of 1.1T yuan.
New trust loans, which are receiving much focus due to the risk of defaults, halved to 106.8B yuan from 210.8B yuan a year earlier.
The continued expansion in credit should help the economy keep its momentum, although it contrasts with the People's Bank of China's attempts to rein in the soaring debt and protect the stability of the financial system.
"The PBOC is trying to take the punch bowl away but the banks are continuing to lend and keep the party going," says Société Générale's Guy Stear.
M2, China's widest measure of money supply, +13.2% on year in January, in line, vs +13.6% in December.
China's exports accelerated to +10.6% on year in January from +4.3% in December and slayed consensus for a rise of just 2%.
Imports increased 10% vs +8.3% and +3%.
The trade surplus grew to $31.86B from $25.6B and vs forecasts for a drop to $23.65B.
However, analysts are skeptical: they had expected that the long Lunar New Year holiday would drag on trade last month, whilst other economic data has been disappointing. They warned that the trade figures, as in the past, could have been boosted by fake transactions by traders looking to avoid capital controls and bring cash into China.
"We find this strong level of export growth puzzling," says Nomura economist Zhang Zhiwei. "It is unclear to what extent the strong export data reflects the true strength in the economy." (PR)
The People's Bank of China is prepared to tolerate "reasonable" volatility in money-market interest rates as it attempts to rein in soaring debt in the country.
While the PBOC will ensure "appropriate liquidity," it won't fund growth that is dependent on investment and debt.
"The massive borrowing and construction led by local governments in recent years" increased risks in the economy, the bank said. Such a model can "easily lead to rising debt and may squeeze credit for other players, especially small businesses."
The PBOC's remarks come after repurchase rates spiked to high levels at various points over the past several months, causing ructions in stock markets. The bank credited a particularly sharp rise in June with taming excessive expansion in money and credit.
In order to draw the necessary capital to pull emerging markets out of their swoon, real interest rates have to go higher, says Citigroup. A near-doubling of the benchmark rate in Turkey last week only pulled one-year borrowing costs up to 3.6%, less than half the average in the thee years prior to 2008. The real yield in Mexico (EWW) is about zero. In South Africa, it's 1.4% vs. 2% over the past decade.
“When you have low real rates and try to finance your current-account deficits, it usually won’t work,” says Citi LatAm strategist Dirk Willer. “If the U.S. is repricing for higher rates, it’s very difficult for you to get away with lower rates. South Africa (EZA) and Turkey (TUR) are not safe yet.”
“International monetary cooperation has broken down,” says India central bank boss Raghuram Rajan, a day after the Fed boosted the size of its taper and made no mention of melting-down emerging markets. Rajan joined counterparts from Turkey and South Africa this week in boosting rates to try and stem the slide in their domestic currencies.
"The challenge is brought on by their own domestic policies," says former Fed Governor Randy Krosner. "It's unfair to say it's all the Fed's fault."
Back in his IMF days in 2011, Rajan authored a report calling for the formation of a committee composed of representatives from the major central banks who would report on the spillover consequences of their individual policies. Good luck with that one.
Emerging markets are getting a respite today amid a big rally in the West (of the West is rallying because of a respite in emerging markets).
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