I've been reading several posts regarding the upcoming crash of the Chinese economy and I was wondering how it would turn out. It appears that it might be quite soon, possibly this year or the next.
How will the crash of Chinese economy turn out? What will happen to the world economy? Please lend me your thoughts.
I'm not a specialist of the bond market and the credit-based economies, but I'm pretty sure the predicted crash will be based on the fabricated credit regime, the lack of personal savings (which is the base of all wealth), the problematic currency devaluation made by the Chinese Central Bank and the wide trade deficit -which, for once, is problematic because it means there is too much wealth exported and not enough products imported or conserved.
And it is true that many influential libertarians believe in a Chinese crash. Gary Johnson talked about this as an excuse for not worrying about the Chinese military development, while Peter Schiff is of the same opinion. However, I tend to agree with the geostrategist George Friedman, who sets the collapse of the Chinese economy around 2020.
One effect of such a collapse could be political. The entire Chinese totalitarian regime relies on the economy and the industrialization of the seacoast. Let this binding fail and all the faraway provinces, including Tibet, will use this opportunity to leave Beijing's oppressive and collapsing rule. So at the end of the day, it could be a benefit for those that don't live in the industrialized China, which means most of the land. But I can't tell you how the rest of the world will be affected.
The chinese economy is already collapsing. Property prices are falling rapidly, and growth is slowing. The reason is because the Chinese are trying to tackle their price inflation which is beginning to get out of control. This is the reason why they have been increasing the value of their currency to try and country the price inflation but this is also what is causing to start crashing.
'' The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.'' Stephen Hawking
Again, if we could make accurate forecasts we could all quit our ordinary jobs and become true speculators.
Right now there are three immediate threats to China's boom: runaway inflation, housing bubble and a decline in exports.
Runaway inflation is probably the gravest right now. CPI growth in China is already over 5%: the real figure is probably between 8 and 10%. While nobody in his right mind can say the People's Bank of China has sane monetary politics, the same applies to the Fed and the ECB. Chinese authorities have time and time again expressed their concern for the massive liquidity injections in the West, not because they are opposed to the them, but because it forces them to inflate even more to keep their exports palatable. Add on top of that the pented up liquidity of QEI (not to mention the ECB "unlimited liquidity" scheme) has already started to trickle down, making commodity prices explode in face of declining demand (crude consumption is on a slow but steady decline due to both decreasing economic activity in Europe and refining "bottlenecks" worldwide) and you start to understand why the Chinese government itself is so worried about runaway inflation. They let the inflationary genie out of the bottle and now they are desperate trying to cork it up again.
The housing bubble deserves little attention, since it has already been covered time and time again. Suffice to say it's closely tied with the massive overcapacity in many industrial sectors: Chinese steel, glass, cement etc industries are currently working at 60-75% of capacity despite artificially inflated demand. Heavy industry has always been a pet peeve of Stalinist and Maoist "economists" and the Chinese government spared no effort. After they built it up they had to find something to do with it. While I personally believe China can handle her own housing bubble much better than Spain, the question of industrial overcapacity remains open. Europe, the USA, Brazil and other countries have already enacted anti-dumping on Chinese heavy industry products.
Finally exports. As part of their attempts to "cool down" the economy they set on fire in the first place, Chinese bureaucrats have recently started to slash tax returns for exporters. Let's be frank here: China can export so much junk because, plainly put, many exporters can sell abroad at cost or even at a small loss and then make profits out of tax returns. Problem is our shops are overloaded with aforementioned junk and there are less and less buyers. In the 2011 pre-Christmas period, the Shanghai harbor moved one million metric tons less export goods: it never happened before. Chinese authorities said declining orders from Europe were the main cause. The Chinese are even more merchantilist than the Koreans and the Japanese: their exporters are massively subsidized both directly and through inflation. If I remember correctly exports account for a massive 30% of the Chinese economy. We can muse how much we want about the Chinese being able to crush any dissent without mercy but a time will come when the remaining 70% of the economy will say "That's enough for now". The Party will have to listen and act accordingly.
Personally I feel China is safe for the time being: that's why I still have money invested there, though in activities less likely to feel the heat (the four big State-owned banks, Sinopec, PetroChina, Tsingtao Brewery etc). I really hope to be able to read the signs before they have any major trouble.