Taking Risks and Reaping Rewards

Could China Collapse?

China announced that they are trying to slow the pace of lending.

That move, along with several others recently, is sending fear about a China collapse throughout the markets. 

It's pretty clear that China has been lending too much money as this chart shows:

The growth needs to be slowed, not only for the typical reason of inflation, but because China is producing a lot of goods, especially real estate, that it can't use efficiently. In fact, many buildings are just sitting empty.

Many pundits have pontificated that Shanghai and Hong Kong have their own real estate bubble going on. 

The FT reported that former Morgan Stanley chief Asia economist Andy Xie said, "China's asset markets are a Ponzi scheme."

A ponzi scheme is scam where the scam artist uses money paid from new investors to pay off previous investors and they never really make any real profit. This works until there are no more new investors and then system collapses. 

Could this really be what's happening in China?

In addition to material from reasonably reliable sources, I was fortunate enough to have dinner with a good friend recently that just came back from three months in China.

In sharing his experience he made it clear not only was China going to have significant real estate problems, but also the people in China that are involved know it.

He felt their attitude is that they need to get as much as they can right now because they don't know how long the good times will last.

Further, he said the pace was at a furious dot-com like speed. Clearly not something that can continue.

While this is anecdotal evidence, there is no better way to understand what is going on than to talk to the people involved. 

Plus this is just another confirmation of the information that is already in circulation. 

Why this matters to you

China led the global markets out of the recent downturn by increasing spending faster than any other nation and creating demand that pushed all markets higher. 

The reversal of that would push most, if not all, markets lower and that's bad for everyone.

China is now a big part of the global economy. It will likely surpass Japan shortly to become number two behind the United States. (Assuming you don't add up all the countries in the EU).

They're so big and so integral that if they have a problem, then we have a problem.

And we don't need any more problems.

Just because the view of their past results, outstanding growth for over a decade, is clear in the rear view mirror, there is no guarantee that the road ahead won't have a few sharp turns in it. 

Keep both eyes pealed on the foggy windshield ahead.

Could China Collapse?

Yes.