Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Changes in the Chinese Economy That Will Alter Your Investment Strategy

Stock-Markets / Chinese Stock Market Jun 26, 2013 - 03:29 PM GMT

By: InvestmentContrarian

Stock-Markets

Sasha Cekerevac writes: We are all aware that the global economy is still relatively stagnant, running below optimal gross domestic product (GDP) levels. Specifically, the Chinese economy is not only experiencing a slowdown in growth, but also a liquidity crunch.

One of my concerns regarding the Chinese economy over the past couple of years has been the rampant increase in credit and loose lending standards. Because the Chinese economy has become such an integral part of the global economy, if imbalances within that nation aren’t addressed, this will lead to further speculative boom-and-bust cycles.


Last week, the interbank lending rate, which is the interest rate banks charge when they lend to each other, spiked to 13.44%. This compares to an average of 3% over the past 18 months. Since last week, the interbank lending rate has fallen back to 6.48%; still, concerns are mounting over liquidity constraints. (Source: Wassener, B., “Asian Markets Falter After Central Bank Statement,” New York Times, June 24, 2013.)

The global economy has relied too much on excess credit for growth and an increase in debt over the past decade. We have seen what happens with too much credit when the U.S. housing market crashed a few years ago.

But the Chinese central bank did not step in initially when the interbank lending rate skyrocketed. That is a sign to both banks and companies in China that they will not necessarily be bailed out without suffering costs associated with poor lending practices.

It’s a sign of China’s new leadership, which is trying to shift the Chinese economy into an increasingly domestically oriented economy built on lower levels of debt. The focus on lower levels of lending should lead to a stronger long-term Chinese economy.

However, the process of deleveraging is never easy, and in the short term, there are many painful steps that need to be taken. Because the Chinese economy has grown to be so large, those people who think it can continue growing at 10% or more per year clearly don’t understand the law of large numbers and the limits to growth.

As a country becomes a larger part of the global economy, it can only maintain a certain level of national growth. As the Chinese economy tries to shift to a more stable footing, it will naturally lead to lower levels of economic growth. That situation is much like the one here in the U.S., where the economy cannot grow at a pace faster than approximately three percent without serious consequences, even though the U.S. is still a leader in the global economy.

The chart for the Dow Jones Shanghai Index is featured below:


Chart courtesy of www.StockCharts.com

Even though the actions being made by leaders in China will be beneficial in the long run, the short-term pain for companies in the Chinese economy can be quite severe; in fact, that pain is causing many investors to sell their shares of Chinese stocks and sit on the sidelines.

Because credit is now beginning to be reduced through higher interest rates that raise costs, the Chinese economy will have lower levels of overall growth. But that growth will be on a much more solid footing.

The real question is: can the Chinese economy sustain a deleveraging process without too much damage to the global economy? Unfortunately, that is an incalculable variable because so much lending within the Chinese economy is not done through official channels, but rather through shadow lending facilities.

I certainly would not be foolish enough to try to predict the full extent of the debt that has been built up by corporations and local governments within the Chinese economy—but I do know that it is quite substantial. And while I think it’s a positive effort for the long run that the Chinese leaders are trying to reduce this leveraging within the Chinese economy, the pain that will initially be felt by the global economy could be substantial.

We are still in the early stages of this transitional shift within the Chinese economy; therefore, I will need to see several more months of data before being able to calculate the true extent of the impact this shift in China will have on the global economy.

This article Changes in the Chinese Economy That Will Alter Your Investment Strategy was originally published at Investment Contrarians

By Sasha Cekerevac, BA
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

About Author: Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. See Sasha Cekerevac Article Archives

Copyright © 2013 Investment Contrarians - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Investment Contrarians Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules