Quote: China on the Brink Luke Hodgens / Powerhouse Profits -- Never play the money game with communist rules. China is going to find this out the hard way. The vastly growing Chinese economy will soon come to a screeching halt and their new middle class will suffer the most. I've been writing for months about the coming collapse of the Chinese bubble with complete disregard for the effects to follow.
The Chinese government has tried to internally control every aspect of international trade, currency valuation, money flow and interest rates while shopping at the capitalist marketplace. China pegged the yuan (their currency) years ago in hopes of creating a huge export economy. It worked. By not allowing the free market to value the yuan, China has managed to rack up huge trade surpluses, vast amounts of investment capital, and a new middle class of citizen that never before existed.
This all sounds fine and dandy, but when a nation doesn't allow investments and currency to freely float disaster strikes. The communist control over a pseudo-capitalist system is now ready to implode. China has created a monster. The tidal wave of incoming money has set the stage for massive inflation which China cannot control.
Solutions to this coming disaster range from increasing the reserve requirements of banks to increasing interest rates and the inevitable float of the yuan. Unfortunately for the Chinese, nothing can be done to avert the coming disaster. One or all of these options will have to be implemented but none will stop the burst.
China has so deeply entangled her economy in a communist mess that a crash cannot be prevented. Raising interest rates would only attract more investments into the country. With bonds paying higher coupons, foreigners would jump on Chinese debt further increasing money supply and the risk of gigantic inflation.
A rate hike would also cripple the new Chinese middle class home owner and their lenders. China does not have an open mortgage market like we have here, there's no 30 year fixed rate loan. Upping rates could cause the new middle class to become the old lower class as affordability of their homes goes out the window. With much fewer mortgages being paid back, lenders could tumble...not a nice scene.
Increasing reserve requirements will only help banks cover their tails when the proverbial ''poop'' hits the fan, much like fixing a big leak in a ship by plugging it with bubble gum. The yuan float is the only way out of this mess, but it will not and can not stop a crash.
China is a huge importer of raw materials. Although China has massive resources of her own, there's simply not enough readily available to fill her needs. Floating the yuan would give China more purchasing power for the commodities she desperately needs. This would further strain the world oil supply and surely increase price per barrel. If she can afford more she'll buy more. This is bullish news for the world commodities market but not good for middle class China. Being forced to pay mo re for these goods will apply brakes to the economy (good) but also apply severe brakes to the consumer which could eventually lead to smaller companies going under and rising unemployment. Welcome to the real world China! The party is over.
Even if China did realize that they were going to crash and burn with their current policies, I don't think it'd be too outlandish to assume they wouldn't take a hint and change organizational paradigms. In which case, if they knew their economy was going belly-up soon, where would their motivations for not going to war stand?
