Will the next financial crisis be made in China?
Posted on 12 August 2009 with no comments from readers
News that China has slashed credit by three-quarters in July is clearly bad news for the global economy which has been saved from a depression this year by extraordinarily loose monetary policy and a Chinese stimulus package bigger than anything in the West.
Lending tripled to half of GDP in the first half, a clearly unsustainable level and causing huge inflation in commodity prices, particularly oil. No official would ever be sacked for spending spare cash on commodities.
Borrowing cutback
But now the day of reckoning is dawning and Beijing is cutting back on borrowing. The risk to the 80 per cent inflation of the Shanghai stock market and the commodities markets is plain, and as these markets correct the contagion across the world will be considerable.
Financial markets are looking toppy all over the globe. Indeed, the US and European markets may well have topped out last Friday, and the higher you rise the harder you will fall.
What will it take this week to turn this general nervousness about overvaluations? And on many measures shares are far too pricey.
The most obvious news to come must be disappointment about the presumed recovery, or it could be that stocks correct violently in the East and that hits markets in the West.
It certainly does not look a market to be long in stocks. Last night the leveraged short ETFs leapt in value. This is a comparatively easy way to short the market but you still need to remember that market timing is essential as leverage is devastating in reverse.
1930s
After the 1929 crash a big rally followed and then came a largely unexpected plunge to new lows. Who is to say that history will not be repeated and that it will be different this time?
The assumption that a recovery will be made in China could prove false, and instead China prove the source of fresh instability. Chinese exports are down 23 per cent for the ninth month in a row, and that for an economy 38 per cent export dependent.
Not really a cause for stocks to rally 80 per cent is it? The Baltic Dry Index has just slumped as it did last summer before the crash, and that means the global shipping industry is in trouble and trade contracting again. Jump while you still can!
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U.S. stock futures fell sharply Monday after overseas markets extended the heavy selling that began on Wall Street Friday. That pullback followed a weaker than expected reading on consumer confidence.
The Shanghai stock market fell almost 6 percent and the major indexes in Europe were all down more than 1.5 percent.
Oil prices also continued to fall sharply, reflecting the growing concerns about a weak economy that will curtail demand for energy.
Dow Jones industrial average futures fell 180, or 1.9 percent, to 9,141. Standard & Poor’s 500 index futures declined 21.10, or 2.1 percent, to 984.70, while Nasdaq 100 index futures declined 30.50, or 1.9 percent, to 1,584.50.
By Peter Foster In Beijing
Published: 9:25PM BST 17 Aug 2009
The benchmark Shanghai Composite Index fell 5.8pc to close at 2,870.63, its lowest level since June 18, with commodity and property companies hardest hit.
China’s markets have shown increasing volatility this month as investors chase rumours that China’s banks have been ordered to cool the surge of lending seen in the first half of the year.
Some analysts have estimated that up to 20pc of the $1 trillion (£615bn) in bank lending in the first half of 2009 has been funnelled into property and the stock market, creating a fresh round of asset price bubbles.
Reports have also suggested that rises in metal and other commodity prices this year have been driven by Chinese inventory stock-piling rather than actual demand, further dampening the appetite of investors.