Is China about to implode and take our miners with it?

China's current situation likened to the US in 2008 before the financial crisis

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published March 6, 2014 9:33 am AEDT

You wouldn't usually think that a small Chinese company unable to make a US$14.7 million interest payment would cause a ripple let alone bring China's financial system to its knees.

But the scenario is being referred to as China's "Bearn Stearns" moment by Bank of America Corp. US lender Bear Stearns was rescued in 2008 and six months later Lehman Brothers collapsed, in the biggest bankruptcy in US history.

Now it seems Chaori Solar Energy Science & Technology, which makes solar panels, is about to become as well-known around the world as Bear Stearns. Chaori's failure to pay bond holders would be the first time a bond default has occurred in China, but could send ripples through the country's US$4.2 trillion bond market.

Doubts may have been cast in investors' minds over credit risks, and they may begin to reassess their debt holdings.

Billionaire investors George Soros and Bill Gross have reportedly suggested China's current situation is similar to the US leading up to the global financial crisis in 2008.

More defaults are expected and Chaori is unlikely to be bailed out, which could have serious consequences for Australia.

China is our largest trading partner, and Australia relies on China buying massive amounts of our resources, especially iron ore.

An internal crisis in China could see demand for iron ore slow, which would be bad news for our big iron ore miners including Rio Tinto (ASX: RIO), BHP Billiton (ASX: BHP), Fortescue Metals Group (ASX: FMG) and Atlas Iron (ASX: AGO). Iron ore prices could fall dramatically, putting some of the junior, higher cost miners under extreme pressure.

Chinese investors are also big buyers of Australian property. Credit Suisse estimates Chinese buy more than $5 billion of residential property each year, or around 12% of new housing supply.

Should that investment tap turn off, house prices could slump, creating a domino effect on consumer confidence, retail sales and creating a second hit to the stockmarket.

Foolish takeaway

At the end of the day it could just be a storm in teacup. On the other hand, investors may want to take steps to limit any potential damage to their portfolios, and get their cash ready for any opportunities.

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