There has been a steady increase in concern throughout 2014 surrounding China's shadow banking system and that loan defaults are inevitable with some leading analysts even suggesting a Lehman Brothers type default is possible. Lehman Brothers was the investment bank that triggered off the global financial crisis in 2008 when there was a credit freeze and the Aussie Dollar fell to 0.60c. Simply put this was when banks declined to lend to one another because they no longer trusted the other bank to pay back the loan.
Recently the People’s Bank of China (PBOC) has stepped in when there has been a cash crisis between banks and bailed out these smaller shadow banks and avoided further contagion or credit freezes. Some major US Hedge Funds and investment banks are suggesting that an official default by one of these shadow banks is only just around the corner and the PBOC may elect to use one of the potential defaults as a signal that they will not openly bail out every bank when its money flows dry up.
The Weekend Edition of the AFR suggested that China Credit Trust could be the first with its head on the chopping block with a $25 Million dollar loan due in May. This seems like chicken feed in comparison to the Billions that were lost when Lehman Brothers went belly up but it’s the coal mines throughout China with substantially higher loans due in the coming months that may create a tipping point and the credit freeze the market fears. If a default was to happen and this now looks likely this most certainly would put downward pressure on the Aussie Dollar.
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