This could end up being a seminal event. China lets state firms default on derivative contracts The Reuters story makes it sound like soybean and gold derivatives are the issue, but this blogger has astutely noticed that the more important issue could be oil, and China's gripe being price manipulation of the underlying asset by Wall Street banks. China and the Buzz of Default The banks involved may already be technically insolvent under any fair market valuation of their Level 3 assets, and whatever derivative liabilities Chinese state owned enterprises may have are booked as some counterparty's assets, probably the bank's. Defaults by Chinese SOEs would just worsen their balance sheet. I imagine that this is being taken very seriously.
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China has been displeased with recent US monetary policy. Perhaps this is their means to smack the feds (ala GS & JPM) on the wrist without using the nuclear option (selling Treasuries). Add to that Japanâs new leadership has also expressed displeasure with the USâs monetary policy.
Seems to me that allowing firms to default on derivatives contracts is just another way of saying the Chinese gov't will NOT bail out the companies. Given the vehement dislike 'round these parts for the Fannie/Freddie bailouts, it's not clear to me why people would be in any way opposed to such a policy.
These are Chinese state owned enterprises. Its a default. The ratings agencies should lower China's credit rating as a result. If there is no consequence for this action, then they will do it again in the future. China has defaulted!
Any business deemed "too big to fail" is a de facto SOE. They are doing exactly what many claimed they wanted two successive US administrations to do - let the market do its thing.