China’s economy is crashing and Chinese businesses and people are finding it harder to repay loans.
One thing that the mainstream financial media is good at is having “boots on the ground” and connections around the world. The New York Times just published an article about what is really going on inside China. You can read it here: Easy Credit Dries Up, Choking Growth in China
China is has faked the inflation rate for many years leading to the mess they have today.
A new study by Christopher Balding from the HSBC Business School at Peking University details how China is manipulating the rate of inflation.
Mr. Balding says that between 2000 and 2011, China reports that house prices rose by just 8% and urban prices rose 6%.
This is impossible when you consider that China’s nominal GDP quintupled and its money supply expanded sixfold over that same period (see the second chart above).
Mr. Balding writes, “The claim that the housing component of CPI grew by less than 10 per cent between 2000 and 2011 is nothing less than comical.” You can read more about Mr. Balding’s research here: Official manipulation adds 10 per cent to China’s GDP
The collapse in China’s economy should come as no surprise to readers of GuerillaStockTrading. I did an article about the inverted yield curve in China a couple of months ago and what it meant here: How a China Curve Will Make the Future Miserable. I also did an article on July 1st, 2013 about the possibility of China’s economy and markets crashing by the end of 2013 here: China Crash In Months – Too Crazy To Be True?
The reason that China’s economy matters to stock traders and investors, beyond the fact that they are the world’s second largest economy, is that China holds a lot of U.S. debt in the form of bonds. As China’s economy crashes, the government will sell U.S. treasury bonds to raise money. That’s exactly what we are seeing in the bond market. China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows in June of 2013. (Source: China, Japan lead record outflow from Treasuries in June)
As China sells U.S. bonds to offset a decline in tax revenues, it causes bond yields to spike and interest rates in the U.S. to climb higher. The more U.S. debt China sells, the more it makes everything cost more, especially big ticket items like houses that are usually financed with 20 or 30 year mortgage loans.
That’s right. The central bank of China has as much to do with interest rates going up as our own Federal Reserve central bank. That’s what happens when we go so much in debt, and then a foreign country is allowed to buy so much of that debt.