The recent default by Shanghai Chaori Solar Energy & Science Technology was an important event for China and the global economy for three bullish long-term reasons, no matter what the short-term reaction.
It demonstrates the maturation of the market system in China.
Continue Reading Below
There is little long-term good to be done for an economy if a government will not let the market decide the winners and losers. Over 22 years of "The Lost Decade" in Japan is testament to that economic fact. More defaults are good news for the long-term economic health of China, as investors will now take action with the realization the government will no longer backstop dying entities.
China is letting foreign companies step into the debt market.
Daimler AG, the maker of Mercedes Benz automobiles and trucks, was the first non-financial company to float a bond offering in China. Beijing is starting to add depth to its capital markets. That is critical for the economy to evolve. It also offers domestic investors a greater selection in securities purchases, which is always a welcome development.
It contributed to the declining prices of many commodities.
China is, by far, the largest consumer of many commodities -- including coal, copper and iron ore. When there are adverse developments in China, the price falls. The exchange traded fund for copper, iPath Copper (NYSE:JJC), fell more than five percent last week. The exchange traded fund for coal, Market Vectors Coal (NYSE:KOL), dropped more than four percent for the same period. The exchange traded fund for iron ore, iShares Global Materials (NYSE:MXI), was off by over 3.3 percent.
That reduces the prices of these vital commodities to what the actual economic demand is, rather than what speculators think the price will be, based on what China needs. From this, other countries and companies can grow more efficiently due to lower prices copper, iron ore, coal and other products.
There have been many factors contributing to the 5.6 percent decline over the last week for the main exchange traded fund for China, iShares China (NYSE:FXI).
The default of Shanghai Chaori Solar Energy & Science Technology was a major, and much-needed, event. It signals that Beijing is willing to let companies fail, so the Chinese economy will succeed. That is very bullish news for the global marketplace.
2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.