Why We Don't Think China Bank Bailout Signals Hard Landing

What do you do when you are in charge of a command economy and need to preserve economic stability, rein in hundreds of small lenders, address a buildup of private debt and still convince international investors that market forces are playing more of a role? This is the tightrope Chinese officials have been walking in recent years, and it has seemingly gotten a bit more precarious lately. The corporate default rate has ticked up, and the government caused a bit of a stir when it even let a local government financing vehicle (LGFV)—widely considered to have an implicit state guarantee—miss a bond payment. Earlier this year, regulators seized a failing regional bank, warned creditors would take a hit, but then eventually made most of them whole. More recently—and just this week—the state has backed struggling rural banks by having state-owned banks and the national sovereign wealth fund buy big equity stakes. Rumors have dogged other tiny, mostly rural lenders, triggering mini-bank runs that the police broke up. Pundits warn more banking woes are likely next year, and corporate debt fears are mounting. Yet we think a little bit of history and context shows why these events are just part of a widely known, very slow-moving issue—not the sort of fast-moving, huge surprise that could wreck the world's second-largest economy and trigger a global bear market.