When Beijing reported that exports and imports had slowed for the second straight month, investors in emerging markets winced.
It is the first time that exports from the world's second-largest economy have dropped for two straight months since 2009. The drop was not only unwelcome but it was also unexpected – a recent Reuters poll had investors predicting a 4% export rise in March.
2014 has been a turbulent year for emerging markets across the globe and predictions of a Chinese slowdown have been lurking in countless news articles. Financial oracle George Soros started the China crisis chatter, proclaiming in January that 20 years of rapid growth could be coming to an end. Or in his words, "the growth model responsible for its rise has run out of steam".
Talk about the risk of a China slowdown has not abated since then. Aon's latest political risk map downgraded China because of the worsening economic outlook. Aon said political risk in China was "moderately high" and "has occurred at a time of slowing economic growth, which suggests that the economic policy deadlock and economic sluggishness are mutually reinforcing".
China's slowdown has sparked talk of a government stimulus package but this does not look likely any time soon. Chinese Premier Li Keqiang has said he is comfortable with growth falling below the 7.5% target rate this year. Like China's Finance Minister, he wants to focus on the jobs market. However, just because the Chinese leadership is relaxed about the slowdown, it does not mean that there is no trouble ahead.
The real risk of a Chinese crisis stems from the private banking industry and events in the shadow financial sector could prove critical this year. This year has already seen China's first domestic bond default. Trust products have been defaulting and taking bailouts too, sparking concern that a financial crisis is imminent.
However, it remains to be seen whether defaults here would be bad enough to produce a financial crisis and a subsequent tightening of credit. Asset management firm Schroders says that a series of defaults among the country's trusts are likely this year, but they are unlikely to spark a crisis. The companies are unable to create money, have low leverage and little securitisation and therefore would be unlikely to affect the wider financial system as a whole.
For now, Chinese authorities are focused on maintaining confidence in the country's shadow financing system, allowing some trusts to default and then bailing them out. While more defaults are probably coming this year, the government has the tools to cover company losses and the signs are that it will intervene when needed to avert any possible crisis.