People Worry.  But forget about Euroland default risks. Stop worrying about Puerto Rico bonds. Don't fret about India's high inflation (Nov. came in 11.4% up from Nov. 2012) or low growth (industrial production fell 1.8% in Oct.) Stop obsessing about the impact on smaller emerging markets of the coming end of the Fed's taper. They will not doom us.

One key emerging area loan market is expected to blow up in 2014. It is not Greece, Slovakia, or Ireland in Euroland. It is not India despite those lousy numbers, because Indian interest rates will be raised perhaps even before the election by its independent central bank. Brazil will exit its fund. Neither Guam nor the Virgin Islands nor Puerto Rico will default on tax-free bonds.

The problem of default is from China.

"Chinese regulators are pushing banks to strengthen their balance sheets as concern mounts that slowing economic growth may lead to an increase in bad debt. A record 2.6 trillion yuan ($427 bn) of interest and principal on securities issued by non-financial companies must be repaid next year, 19% more than this year", Bloomberg writes. It adds:

"Ten-year AAA corporate bond yields surged 89 basis points since Dec. 31 [2012] to 6.18%, touching a record 6.23% on Nov. 27. That compares with a 70 basis-point rise to 2.68% for similar-rated notes globally.

"People’s Bank of China Governor Zhou Xiaochuan’s signal the central bank will act to prevent excessive leverage has contributed to the surge in borrowing costs and forced many firms to delay financing plans. Rising interest rates may cause a “partial debt crisis to explode,” the official China Securities Journal [editorialized] Nov. 26.

"'The probability of default will get much higher in 2014 as maturing debt reaches a record,' said Shi Lei, the Beijing- based head of fixed-income research at Ping An Securities, a unit of the nation’s 2nd-biggest insurance company. 'The central bank’s policy of controlling leverage, which may last a long time, will crowd out companies with bad credit profiles and, ultimately, help restructure the economy.'

"Following the Communist Party’s Nov. plenum, China’s leaders pledged to allow market forces a “decisive” role in allocati[ng] resources. Société Générale China economist Yao Wei said th[is] signals the government may stop saving troubled companies [ed. or municipalies] which can’t meet debt obligations and allow the 1st bond default in the coming 12 months.

"'If the government is going to let market forces play an important role, it should let those doomed companies fail,' said Yao. 'In industries with overcapacity, such as steel and shipbuilding, there’s a higher likelihood of bond defaults.'"

Jane Bauer of Bank of America Merrill Lynch research writes that Global Emerging Market Bond debt flows are again negative (as they have been all year except for one week). This she blames on Fed taper fears. Investors need to sharpen their pencils and differentiate between higher-risk emerging markets and the rest. It's not the Fed they need to fear. Historically, high US interest rates have not hit emerging market bonds.

I just turned down a $350/hour consulting gig offered for next Monday to instead attend a lecture by Finance Prof. Zhin Cun Bian of Nanjing University, showing how seriously I view the China default risk.

My report on Durig 'exotic' yankee bond offerings resulted in praise from our most experience bond-market-reader. He wrote: "shops like that are all about big commissions and working in unregulated gray areas. Things often end badly for investors but the broker ends up with a yacht."