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Forget Greece. The Sky Is Falling In China

Greece’s three-week bank shutdown cost businesses over 3 billion euros according to the Athens Chamber of Commerce and Industry. Despite such astonishing news from Greece, this week national news outlets focused their resources into forecasting that the sky is falling in China.

In the famous children’s story of Henny Penny, the chicken who believes the sky is falling has a difficult task in convincing her friends that danger is imminent. When it comes to investing in China, the entire world already knows the Chinese market is too perilous for pension and hedge fund managers. No one needs a Henny Penny warning to understand that since China’s government itself owns the primary companies that control the indexes, and they have propelled unregulated cash into these unprofitable ventures, a correction was forthcoming.

Indeed, there is a story to report in China. After recording record highs in June of 2015, it appears that China’s asset nest egg cracked up and sent Chinese stock prices spiraling down more than 30% last week. Over 700 companies listed on the Shanghai and Shenzhen stock exchanges asked to suspend trading. As a result headlines such as “China looks like it is heading for its version of the 1929 stock market crash.” (Source: The Telegraph, UK, July 9, 2015) and even CNBC News “China’s Market Looks Like the Dow in 1929.” (Source: CNBC, July 3, 2015) have every wealth managers attention.
 
 

What has happened? Once upon a time China was a very wealthy country. They made a lot of cheap things and sold them to countries that liked to purchase things that were cheap. Times changed, and the world market changed. In the last decade, China built housing, and highways and infrastructure within their country. Exports from China’s workers dwindled. China over built, and their housing market egg cracked. At the same time their stock market fell. Ouch. It now really does feel like the sky fell in China and China’s mega wealthy citizens have taken a duck and cover stance because of it.

As a result, the top one percent of the Chinese mega-rich are sneaking not all, but large sums of their personal savings out of the country. Since China does not have a public program like Social Security, China’s most wealthy citizens have been investing in U.S. dollars and treasuries to protect their money for retirement. According to the Wall Street Journal, China’s top 2.1 million families control between $2 and $4 trillion in stocks, bonds and real estate outside of China’s borders. (Source: Andrew Browne, “Mega Rich Keep Eyes on Yuan,” Wall Street Journal, February 25, 2015)

 

 

The real danger and panic for China’s markets looms shortly. Since China’s yuan is fixed at 6.21 yuan which is equal one U.S. dollar, China’s banks cannot afford to devalue the yuan, even though the market is begging for a mending. Since China’s double-digit growth has slowed to only a rate of 7% in July, this will cause the U.S. to pressure China again to raise the yuan’s value. China’s government is estimated to own $1.224 trillion in U.S.Treasuries. China buys U.S debt to support the value of the dollar. China will refuse to change the yuan’s value and will instead threaten to call in their debt, reminding the U.S. that China is their biggest banker. It’s a vicious circle of who is in debt to whom much like Henny Penny herself running around in a circle that never seems to end.


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If we all learned anything from 1929, it was not that the danger was in the market correction itself, the real danger was in the bail out pressures made on the banks. Since China happens to be their bank, the pressure for bail outs from their local governments, property developers, and state-owned companies is going to be a tough case to solve. With so many needing a cash infusion, China is going to feel, very American while they use their state-owned banks to carry their state-owned builders and companies through this new financial crisis.

“The sky is falling, cried Henny- Penny, and a piece of it fell on my tail.”

In the various versions of Henny Penny, Cocky Locky, or Goosey Loosey, the birds name changes depending on which country the folktale is shared, the ending of the story remains the same. While the bird tries to warn of impending doom in her efforts to save the world, she ends up in Foxy Locks’s den and is eaten. The moral to be drawn is similar. Although we still are unsure of which country will represent the Fox.





2 responses to “Forget Greece. The Sky Is Falling In China”

  1. Money Beagle says:

    The thing about the big declines is that the stock market over there went up something like 250% over a single year, so while a 30% drop is still nothing to sneeze at, anybody that bought in prior to a year ago is still sitting on plenty of gains.

    • Martin says:

      Which I believe is quite scary. Considering nontransparent Chinese market. Nevertheless those gains can evaporate quickly if it really flips into more selling and it can get ugly. Let’s see what will happen though.
      Thanks for stopping by and commenting MB!

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