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A blog by Leon Oudejans

Chinese implosion

9 January 2016

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To my surprise, Google does not even recognise the search term Chinese implosion. Google wants to change my search term into Chinese explosion to reflect all the devastating incidents in that field. The worst devastation however will probably be caused by the still lingering Chinese implosion.

The last few days, the global stock markets are in turmoil – again – over the renewed turmoil on the Chinese stock markets. Unfortunately, the financial markets are not under the control of the Chinese government. Else, we would probably not even have noticed.

BusinessInsider (2013): “If there has been one prediction made more than any other over the past couple of decades, it’s that China’s miraculous economy is headed for a fall. China bears have pointed to a long list of disasters-in-the-making, from questionable economic statistics to skyrocketing real-estate prices to ghost cities to centrally planned growth to corruption to pollution to civil unrest to debt. And yet, despite all of these concerns, China’s economic machine has just kept chugging along”.

BI (2013): “According to the Telegraph, Fitch analyst Charlene Chu has concluded that China’s growth is being fueled by a credit bubble that is unlike anything the modern world has ever seen. This debt bubble is leading to massive overbuilding, Chu says. And when it finally bursts, as debt bubbles always do, China will be looking at a Japan-style depression and deflation”.

BI (2013): “Given the number of China doom prophesies that have been made over the past two decades, you can be forgiven for rolling your eyes at this one and moving on. But Chu does cite some startling statistics, including the claim that China’s debt-to-GDP ratio has quietly shot up to more than 200% and that each additional yuan borrowed is producing ever less growth. If there’s any hard law of finance, it’s that what can’t go on forever won’t. And borrowing at this rate relative to economic growth can’t go on forever. That said, as always, the key question is “when?” Italic marking is mine.

Today, it is January 2016 and the implosion has still not happened. That does not mean that it will not happen. The same logic was used on debt fuelled US and European real estate prices: For decades, their only way was up. Until a silent sell-off and then a wide-spread panic emerged. The main difference is that China is not a real market economy and that the government still decides on most. A new in-depth analysis (eg, economical, political) would not add any value as Chinese data may be totally unreliable. So, what type of event(s) could trigger a Chinese implosion??

In all my years in business, I have learned that one parameter seldom lies: cash. In any situation, a shortage of money – to sustain debt or operations – is able to trigger an implosion. In that context, the current massive Chinese outflow of foreign currency is worrisome. Willem Buiter, chief economist at Citigroup: “Since August there have been several months in which more than €100 billion left the country.” A quote from his recent interview in the Financieel Dagblad.

The Wall Street Journal of 7 January 2016: “With the $107.9 billion drop in December, Beijing’s foreign-exchange reserves have fallen every month but one since May. The data suggest the central bank is having to spend huge amounts of dollars to support an increasingly beleaguered yuan amid decelerating economic growth and the onset of higher U.S. interest rates. “It certainly confirms the end of an era,” said Oliver Barron, head of research at investment bank North Square Blue Oak. “What we’ve been seeing is China now becoming an exporter of capital.” Italic marking is mine.

If this Chinese capital flight to safer harbours with a higher return accelerates – or gets “stopped” by the Chinese government – then this may finally become the tipping point for the imminent Chinese implosion. Its devastation will not stop at the Chinese borders though.

Accounting is an opinion, revenue is vanity, cash flow is sanity, statistics are a lie but Cash is King.

Simply Red – Money’s Too Tight To Mention (1985) – artists, lyrics, Wiki-1, Wiki-2

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