Thursday, July 17, 2014

What To Expect If China Crashes

China surpassed Japan in 2011 in gross domestic product and it's gaining on the U.S. Some World Bank researchers even think China is already on the verge of becoming No. 1 (I'm skeptical). China's world-trade weighting has doubled in the last decade. But the real explosion has been in the financial sector. Since 2008, Chinese stock valuations surged from $1.8 trillion to $3.8 trillion and bank-balance sheets and the money supply jumped accordingly. China's broad measure of money has surged by an incredible $12.5 trillion since 2008 to roughly match the U.S.'s monetary stock.
This enormous money buildup fed untold amounts of private-sector debt along with public-sector institutions. Its scale, speed and opacity are fueling genuine concerns about a bad-loan meltdown in an economy that's 2 1/2 times bigger than Germany's. If that happens, at a minimum it would torch China's property markets and could take down systemically important parts of Hong Kong's banking system. The reverberations probably wouldn't stop there, however, and would hit resource-dependent Australia, batter trade-driven economies Japan, Singapore, South Korea and Taiwan and whack prices of everything from oil and steel to gold and corn.
"China’s importance for the world economy and the rapid growth of its financial system, mean that there are widespread concerns that a financial crisis in China would also turn into a global crisis," says London-based Slater. "A bad asset problem on this scale would dwarf that seen in the major emerging financial crises seen in Russia and Argentina in 1998 and 2001, and also be more severe than the Japanese bad loan problem of the 1990s."
Personally, my finances would probably get hit harder if China implodes than they did in the Great Recession.  My investments are ridiculously over-weighted in basic materials and heavy industry.  For some crazy reason, I decided that some coal and iron ore stocks looked cheap.  Well, if the Chinese economy seizes up, they'll get a ton cheaper (I maybe ought to cut my losses in those).

Then there's the risk on the farm side.  I could see corn in the $2 dollar range for a little while if things really went to hell in China.  That would make a lot of overpriced farm ground lose a shitload of value.  Likewise, if Chinese oil demand slackened, oil prices would get crushed, and there could be a lot of defaults in the oil patch. Scary as it sounds, we may have to hope that the Chinese Communist party is smarter at the Capitalism game than the stooges here in the States who seem to think they invented it.  If they aren't, we all might be, like Private Pyle, in a world of shit.

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