NEW YORK (Real Money) -- Is bad news good news in China, too? Or is it just plain old bad news? On Wednesday night, when we learned of a downtick in a key gauge of the Chinese economy, a shudder went through the Asian markets. There had been hopes that China could show some consistent growth in 2014, but those hopes were dashed when a manufacturing reading showed the first contraction in six months: 49.6, when people were looking for 50.5.
For a very long time, weakness in China was taken as a prelude to expansionary policies that would put the country back on a growth path. Lately, however, the Chinese leadership has been trying to get off the treadmill of steroidal growth. That means reining in excesses, particularly at the heretofore autonomous state-run organizations. Many of these seemed seem committed to overproducing in areas in which production should be cut back, mostly for what appears to be personal gain.
Now, the manufacturing-gauge slowdown shouldn't be that revelatory. In fact, if you have been watching the slip-sliding of the Baltic Freight Index for the last month, you know that China's economy seems to have hit a real air pocket. That's been confirmed by the best China-watcher I know -- Klaus Kleinfeld, the CEO of Alcoa (AA - Get Report). He's got a lot on the line, because some of the Chinese state-run aluminum smelters are overproducing. That is causing a glut, and it's also contributing to the worst air in the world, soon to be a major Chinese export.
With that backdrop in mind, enter Credit Equals Gold #1 Collective Trust, a $500 million piece of paper -- an exceedingly polite way to put it -- that appears slated for default at the end of this month. This is one out of billions of dollars' worth of wealth-management products that appear to be on the ropes because of sloppy bank practices. More important, if this is allowed to fail, it will be the first piece of paper for which losses will be truly shared by the public. No FDIC, Chinese or otherwise, on this one.
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Now, when I first heard of Credit Equals Gold #1 Collective Trust, a bond issued by China Credit Trust -- itself now probably considered on the ropes by some because of this kind of paper -- it made me snicker. How do they come up with these names? But then I remembered all of the silly and often highfalutin names our terrific bankers came up with here for terrible mortgage trusts that packaged the dregs of our housing loans.