That’s the question being raised this morning by the folks at Bloomberg. “Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014,” they write. New bond sales are being cancelled, and the rating agencies – always behind the curve – are scrambling to downgrade debt “at a pace unseen since 2003.”

We knew this one was coming. China’s corporate debt has been growing at a breathtaking rate – doubling in a year – and is now in the neighborhood of 150% of the nation’s GDP. That’s helping to hold up the nation’s growth, but it can’t go on forever. The fact the Chinese government is now allowing a few state-backed enterprises to default is probably a good thing, ending the perception of an implicit government guarantee. But the question is whether the Chinese central bank can manage an unwinding of corporate debt without triggering a rout.

We may be about to find out. Given its size, a swooning corporate debt market would be a much bigger test for the Chinese economy than last summer’s stock market plunge. Keep your eyes on this space.

More below, including the latest bolt of bad news for Elizabeth Holmes at Theranos. Enjoy the day.

Top News

•  Bubble, Shmubble

If China really is melting down, no-one has told the U.S. stock market yet. The S&P 500 is back within a couple of percent of the all-time high it set back in May (and is indicated to open another 0.5% higher Tuesday), despite a start to the first-quarter earnings season that is best described as being a bit less awful than expected (viz. Morgan Stanley and IBM yesterday). The optimism is so catchy that Bank of America Merrill Lynch is even recommending Emerging Markets to its clients again. Traders appear to have taken heart from the market’s ability to shrug off the sharp drop in oil prices after the collapse of a mooted deal on output restraint by Saudi Arabia and other big producer nations. Low oil prices were earlier seen this year as a harbinger of collapsing world demand, but the weekend’s developments suggest it’s “only” the supply-side result of a bitter power struggle between two inflammable and highly-armed rivals in the world’s least stable region. So that’s all good, then. For what it's worth, oil futures are also back above $41.50 a barrel, thanks to a strike in Kuwait that is temporarily fixing the world supply glut largely by itself.   Financial Times, subscription required

•  Theranos News Goes From Bad to Worse.

Truly, when sorrows come, they come not single spies, but in battalions. Federal prosecutors and the SEC have launched an investigation into whether the embattled blood-testing company misled government officials and investors, respectively, about the state of its technology and operations. Other agencies which have opened probes against the company include the State Departments of Health in Pennsylvania and Arizona, The Centers for Medicare and Medicaid (CMS), and the U.S. Food and Drug Administration. The Wall Street Journal reported that Walgreens Boots Alliance, Theranos’ main conduit to consumers, has also received subpoenas seeking testimony about representations made to them by Elizabeth Holmes’s company. This too, too solid growth story has melted, thawed and is resolving itself into a dew by the day.  Fortune

• Netflix's Growing Pains

Shares in Netflix took a beating after hours Monday, as investors were left unimpressed by a comparatively lackluster growth outlook and a sharp fall in profit margins. The company actually added more subscribers than the market expected in the first quarter, but higher costs for buying in content from rivals, a forecast of considerably slower growth and the prospect of stiffer competition from Amazon Prime (now also available on monthly subscription) all led investors to take a reality check of one of the valuation on one of the stock market's darlings of last year.   Fortune

• Asahi Helps AB InBev Clean Up Its Megamerger 

AB Inbev, which is shedding non-essential brands from its post-merger portfolio to appease antitrust regulators, has agreed to sell the Peroni and Grolsch lagers to Japan's Asahi for just under $3 billion. The deal now means that it has removed the biggest antitrust stumbling block in Europe, after having already found solutions in North America, by selling its stake in the Miller Coor's joint venture, and in China, by selling out of the brewery that makes Snow, the world's biggest selling beer by volume.   WSJ, subscription required

Around the Water Cooler

• Lone Star State of Emergency 

Texas Governor Greg Abbott has declared a state of emergency after 17 inches of rain fell on Houston and its surroundings within hours Monday, leaving five people dead and bringing chaos to transport networks. Bush Intercontinental Airport is due to reopen at 0700 local time, after cancelling nearly 650 flights on Monday, but area schools are expected to remain shut for another day. The authorities are asking residents to be alert to the danger of flash floods and "changing conditions" in general. A state of disaster has been declared in nine counties.   City of Houston, Mayor's Office

• BMW's i-Managers Defect to China 

The people behind some of the most acclaimed electric vehicles on the roads have defected to China, according to Bloomberg. Three of the team that head's BMW's i-subbrand, including Benoit Jacob, the designer of the i8 sports car, have jumped ship to join Future Mobility, an EV startup backed by Tencent Holdings and Foxconn Technology, neither of which has any pedigree in making cars. If confirmed, it's a huge statement of ambition by the Chinese groups, one that mirrors the ambitions of the country's government to cut road pollution as fast as possible and get ahead of the game in designing the auto of the future. It also raises more questions, in the wake of the VW scandal, about the ability of Germany's carmakers to meet the same challenges.  Bloomberg

• VW Is Struggling to Meet its Date With Destiny

On which subject, Volkswagen is struggling to meet its self-appointed deadline to complete the internal investigation into how it managed to produce 11 million cancer-spewing diesel vehicles without anyone on its management board apparently noticing, Bloomberg reports. The internal investigation that it commissioned seven (sic) months ago is being held up, among other things, by investigators needing to unravel dozens of code words in e-mail correspondence trails. Chief among these is the term "acoustic software" to denote the illicit packages of code that were installed to mask the actual level of noxious emissions in normal driving from regulators. VW has until Thursday to strike a deal with the EPA and California Air Resource Board on fixing the cars that are currently in breach of U.S. environmental regulations.  Bloomberg

•  The Pitfalls of Being an Outsider CEO

Common wisdom has it that CEOs who are brought in from outside a company often perform better than insiders who are promoted. But it seems that law doesn't hold everywhere. A new study by PWC shows that external CEOs in the U.K. are more likely to underperform than insiders, and more likely to be forced out as a result. PWC, which sells consultancy services on succession planning, argues that this is as much an indication of poor succession planning by British companies as anything else.  The Financial Times