Oil prices to suffer as Chinese economic miracle ends
Posted on 07 July 2010 with 2 comments from readers
The first signs of a serious slowdown in Chinese economic growth are beginning to emerge with Goldman Sachs and others downgrading their forecasts. It is demand from China that has kept the oil price high over the past year, combined with speculation by hedge funds, and speculators are also beginning to pull their investments.
This cannot be good for oil prices which face a repeat of the December 2008 lows as financial markets sell-off into this autumn. European markets enjoyed a good day yesterday but Asian stocks moved lower overnight and US futures are down. China’s stock market lost the most in a year last week.
Rogoff’s warning
Havard professor and former IMF chief economist, Ken Rogoff told Bloomberg that the Chinese property market is starting to collapse. China has been actively tightening its home lending policies because the economy is overheating with runaway inflation.
To observers sat in Dubai this is highly reminiscent of the first half of 2008 before the Dubai real estate market crashed in the autumn. Standard Chartered is forecasting up to a 30 per cent drop in property prices in China’s big cities in the second half of 2010.
Will this be ‘Dubai x1,000′ as hedge fund manager Jim Chanos predicts? He is famously shorting China, a strategy endorsed by Dr Marc Faber who is sure this is right but not sure when. Dr Faber correctly warned that Dubai property had become a bubble.
Global growth engine
However, the implications of a Chinese property crash are far more important. China has become the engine of global growth since the financial crisis of two years ago. If Chinese demand falters it will be exceedingly important for commodity prices, including oil, and by extension the stock market too.
The Chinese stock market has fallen sharply since last August, an indicator that economists tend to ignore. They made the same error in ignoring the Dubai Financial Market crash of 2006 as a forward indicator.
The problem is always that after a long period of above average growth commentators are seduced into projecting growth lines ever upwards. But emerging markets are notorious for their deep market cycles. As Ken Rogoff also warned in his book ‘The time is different’, this seldom if ever proves to be the case.
2 Comments posted by readers:
I’m afraid you are right. If China does go into a recession we could see a huge stock market crash. It will be interesting to see what governments do to try to stop it. Will they buy stocks? The market is way up today on almost no volume.
One of the market bloggers discovered someone putting giant stock orders in during the night over here in the USA, and then withdrawing them before they could execute. He has a video that shows the huge orders popping up on a computer screen and than vanishing in a second or so, supposedly without the trade going through. Not being an expert on how such trades are done, I’m not sure, but it does appear to be an attempt at illegal market manipulation. After reading Matt Taibbi’s article in Rolling Stone on naked short sellers creating stocks that don’t exist, nothing surprises me anymore.
Good commentary, Peter!
@Bill Simpson
Regarding your question “It will be interesting to see what governments do to try to stop it. Will they buy stocks?”, I have the following response:
The US Govt (via the FED) and their agents GS and JPM have been extremely active in buying US stock futures (Dow as well as S&P, etc.), naked short selling of commodities and specific “targeted stocks”, etc.; this is true for almost every trading day over the past 16 months! The “evidence” is overwhelming, and every active trader on the floor of the exchanges knows this. Significant “market meltups” on very low volume have been, and continue to be rather commonplace these days.
Equally important, this same group of culprits have been manipulating just about everything that they can, in order to get prices to where THEY WANT THEM TO BE. This includes the suppression and naked short selling of precious metals prices, oil, foreign currencies, and other commodities. It’s so blatantly obvious that if you teach a 10 year old the “basics” in trading, he/she would be able to see it clearly.
As GATA has been saying for the past 18 months now, “there are no free markets anymore, only interventions!”