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Trade Data Show China’s Credit Bubble is Bursting, UK to See Deflationary Effects – Global Depression Ahead?

Economics / China Economy Feb 09, 2015 - 02:53 PM GMT

By: GoldCore

Economics

- Chinese imports, primarily of raw materials, crashed 19.9% in January

- Exports fall 3.3% against expectations of 6.3% rise

- Total Chinese debt rose from $7.4 trillion in 2007 to $28.2 trillion in 2014

- Capital outflows last quarter were the highest on record

- China may devalue yuan to boost exports

- Currency depreciation by worlds biggest exporter may trigger global deflation and depression


China’s debt-driven economy and monumentally wasteful building boom which has created entire cities with no inhabitants looks set to unwind as figures show that Chinese imports of raw materials continue to decline.

Imports fell 19.9% year on year in January. While such a dramatic slump can largely be explained by considerably lower prices for raw materials the data shows that imports are down in terms of volume also.

Iron ore imports fell by 9.4% in volume (YoY) while coal imports fell almost 40% by volume and oil by 7.9% between December and January. Imports into China have been declining every month since October.

Last year the Chinese Lunar New Year fell in January which caused factories to close for a week. This year, Chinese New Year falls this month. So these figures are particularly shocking given that industrial capacity was roughly 25% higher this January than in January 2014.

Meanwhile, exports also fell 3.3%. A Reuters poll of analysts had expected a 6.3% increase.

China is showing signs of being “maxed out” on credit. In 2001, total Chinese debt was $2.1 trillion. By 2007 it had swelled to $7.4 trillion. By last year it had bloated to $28.2 trillion. In the same period (2007 – 2014) China’s GDP grew only $5 trillion.

So, as David Stockman points out in his excellent article “China’s Monumental Debt Trap – Why It Will Rock The Global Economy”, “The China Ponzi took on $4 of debt for every new dollar of freshly constructed GDP”.

China’s new leadership is trying to get China’s reckless borrowing under control. The policies by which this might be achieved are, unfortunately, diametrically opposed to the only policies that central planners believe can stimulate an economy.

From Bloomberg:
“As China grapples with its slowest growth in 24 years, President Xi Jinping is under pressure to stimulate the economy. Yet that would run afoul of his pledges to curb runaway debt and credit (the latter jumped about $20 trillion from 2009 to 2014).”

The PBOC has already cut interest rates this year and on Wednesday it announced a reduction on the amount of cash reserves that banks must keep to hand from 20% to 19.5%. That they did not lower the reserve requirements by a larger margin indicates that Beijing fear over-heating the economy – particularly the property sector.

China’s bloated property sector is collapsing under its own weight. Unless the manufacturing sector can pick up the slack – which is unlikely – there will likely be social unrest across China as unemployment soars.

With exports sluggish and the wider world in a deepening recession china’s capacity to export is unlikely to improve. It may be forced to wade into the currency wars and slash the value of the yuan in order to undercut its exporting rivals in the region, particular Japan who have forced the yen downward by 30% under “Abenomics”.

To compound its problems China is also haemorrhaging capital as investors see economic strife and possibly aggressive currency devaluation on the horizon.

“The latest balance of payments data show that china posted its biggest quarterly capital and financial account deficit on record in the fourth quarter last year, a trend that is likely to have continued in January,” the Financial Times reports.

The consequences of a currency devaluation by the worlds largest exporter cannot be understated. China would, in effect, export deflation globally as other exporting nations follow suit in a race to the bottom.

Developed world economies are already experiencing deflation. Producers in importing nations would be forced to reduce their prices and lay off staff to compete with cheap imports compounding the unemployment crisis in which the western world finds itself.

Soon, business loans and those of households would go into default exacerbating the deflationary spiral. The insolvent banking system would be again in crisis and this time deposits would be “bailed in.”

Chinese deflation pressures will heighten local economic pressures as UK consumers experience persistent falling prices and put off major purchasing decisions in the expectation so cheaper prices. The risk is that as prices fall across the board, British labour earnings will also fall as profit margins contract for British companies.

Many UK investors have been purchasing Gold Bullion in the United Kingdom over the past 6 months in expectation of economic dislocation caused by the depreciation of global currencies.

Indeed, the whole paper and digital currency system would be undermined and might not survive.

Throughout history, gold has retained its value. It has fluctuated in its appeal but it has never lost its function as an indestructible store of wealth. No paper currency can make the same claim.

In fact, the US dollar is the longest surviving paper currency in history. It became a purely paper currency in 1971 when President Nixon shut the “gold window”. It has outlived its predecessors but we do not expect it to do so for very much longer.

It is essential at his time to protect one’s wealth with physical gold stored outside of the banking system. See our guide to the “7 Key Gold Storage Must Haves.”

MARKET UPDATE

Today’s AM fix was USD 1,242.25, EUR 1,096.18 and GBP 816.20 per ounce.
Friday’s AM fix was USD 1,264, EUR 1,103.64  and GBP 824.74 per ounce.

Gold fell 2.72 percent or $34.50 and closed at  $1,235.70 on Friday, while silver slid  3.18 percent or $0.55 closing at $16.75. Gold and silver were both down for the week at 3.78 and 2.95 percent respectively.

In Singapore, gold climbed for the first time in three sessions on Monday hitting a session high of $1,238.60, boosted by safe-haven bids as Asian equity markets fell on disappointing Chinese trade data.

Spot gold in London moved slowly upward near $1,242 per ounce.

The U.S. employment data released on Friday showed non farm payrolls climbed by 257,000 in January, which surprised the markets since 236,000 were forecasted, however the unemployment rate ticked slightly higher to 5.7 percent.

The most recent CFTC report shows the gold net long position fell 620,000 ounces to 22.19 million ounces, while gross longs were down 1.2 million ounces.

In early trading in London, silver was up 37 cents at $17.04 per ounce, platinum was $4 higher at $1,222 and palladium up $2 at $781.

February 11th is Greece’s next meeting with EU ministers to discuss its rejection of their bailout program.

This update can be found on the GoldCore blog here.

Mark O'Byrne

Director

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