China’s Corporate Sector Is A Pandora’s Box

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China's Corporate Sector Is A Pandora's Box
China's Corporate Sector Is A Pandora's Box

China's Corporate Sector Is A Pandora's Box

Asian concerns are weighing heavily on global markets this morning. Most European bourses opened 1% lower on average following an overnight route of the Asian exchanges. The Hang Seng dropped 1.7% while China’s Shanghai Composite gave up 0.2%, the real loser however was Japan’s Nikkei which dropped 2.6% overnight following the Bank of Japan’s inaction at it’s recent monetary policy meeting.

Japan and China are the two main protagonists in this current round of Asian market turmoil. As evidenced yesterday, Japan is meeting serious challenges in it’s latest attempt to recover from it’s decades long deflationary slump.

The Japanese situation however is somewhat of a benign threat to global economics, should this attempted recovery falter then the world economy will continue with business as usual. China on the other hand is a much more concerning situation, it’s 20 year epic growth run has propelled it to be the world’s second largest economy, it is now so firmly integrated into the global economic ecosystem that, like it or not, China’s problems are the worlds problems.

And right now, China has problems. It is early in the year but it is looking increasingly doubtful whether the 2014 growth forecast of 7.5% will be met, a failure to hit this will result in China’s lowest growth in over 2 decades. This is not the problem per se, China’s economy is maturing and as such a period of slower more stable growth would not necessarily be a bad thing.

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The primary concerns are being driven by the Chinese authorities attempts to ‘modernize’ the economy. As structural economic reforms progress, practices within Chinese corporations and institutions are being uncovered that are giving rise to significant concerns by both domestic authorities and international investors. This is not to suggest that any illegal or untoward practices are present. It is more to suggest that Chinese corporations are not structurally set up to compete in the global economy. Last week for example the Chinese authorities allowed the first bond default by a major corporation to proceed, this doesn’t bode well, China let go of this corporation’s hand and it instantly failed. Rapid economic expansion and government hand holding has spoiled China’s corporate engine, this is becoming more and more evident as the Chinese authorities increase economic transparency.

To contact the reporter of this story: James Brennan at james@forexminute.com