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Would Shanghai trigger another global economic meltdown?

06 Nov 2015 |By: Team Finalaya


A one word answer to the question above should be an ‘yes’. Getting deeper into the pit, one can see nearly the same type of virus that affected America in 2008/2009 is now threatening to rattle the Chinese economy. The name of the virus is ‘debt’.

Many people would have us believe that the banking crisis and credit markets experiencing a seizure in 2008 was all due to the collapse of housing market. But, that was just the symptom and the real disease was insidious ills from cheap credit, promise of bailouts by the fed and low risk.

The pump priming undertaken on colossal scales across the globe is already showing the cracks.

In 2010, Chinese economy was growing at a fat 12%, but many people also forgot that the growth came on the heels of the 2008 Beijing Olympics that saw massive investments into construction and other sectors, particularly the hospitality sector. China failed to build on that impetus and started drifting from the dizzy heights. By 2013, Chinese growth plummeted to 7.4% and most economists are the current year could take the number to the sub 7%. The bubble in the property sector has deflated and is dragging the wider economy down.

Distanced by about 7,000 from the epicentre of the first economic meltdown in the U.S. another one is getting ready to burst, with the epicentre now shifting to Beijing, China. Defaults on corporate debts are mounting and the bail out of Kaisa, a real estate developer based out of Shenzhen who raised over $2.5 billion from the international markets, is a case in point. Sunac, a rival group chipped in as the saviour. Real estate bonds from Chinese developers have already started feeling the heat and with the contagion spreading, an absolute collapse looks imminent.

More like the Americans, the Government in China has applied some cosmetic treatment to the fissures, leaving the underlying virus to proliferate. The banking system in the country is significantly strained their books are bound to be plagued with bad debts in the coming days. A debacle in the Chinese banking sector is bound to carry its ripple effects across the globe and more so, the banks in the UK.

According to a report by McKinsey & Co., global debt has swollen by $57 trillion to $200 trillion in less than 7 years.  This monetary expansion has been lead largely by China through its $4trillion Yuan stimulus pack. The U.S. FED’s QE added another $3.7 trillion with UK and Japan adding more.

Every time we see a flow of cheap money, we can also see the stock markets rising. But, when you use a magnifier you can see that assets that are most overpriced are also those far too distanced from sound principles of valuation.

Fallout from the soaring global debt situation is the mushrooming of some bizarre asset classes. Crypto currency, more commonly known as Bitcoins is perhaps a classic example. We need to relate the growth of Crypto currency to the QE programs in different global pockets. With most QEs tapering or ending, the crypto currency has also collapsed.  But, that is not the only asset class that has crumbled. Look at what has happened to oil and iron ore beginning the last quarter of 2014.

The Baltic Dry Index is another key indicator of international economy. This index is now at 559 which is the lowest in the last 29 years. That also constitutes a strong negative signal for the global economy.

Come to think of it, what if there is a run on any of the fiat currencies?

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