The Chinese Economic Collapse

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It is bad, far worse than is thought.  As is the case in totalitarian governments when economic conditions turn hard down, the scapegoats are to be found within and without.  Finding domestic entities and individuals to blame for a market collapse is bad enough.  The blaming of foreigners has resonated thunderously across the world markets.

In a worrying signal for global investors with a presence in China, some officials have argued strongly for a crackdown on “foreign forces”, which they say have intentionally unsettled the market.

“If our own people have collaborated with foreign forces to attack the soft underbelly of the market and bet against the government’s stabilisation measures then they should be suspected of harming national financial security and we must take resolute measures to subdue them,” said an editorial in the state-controlled Securities Daily newspaper last week.

One Hong Kong-based hedge fund manager, who asked not to be named, said: “Global investors are listening to the language of retribution and watching this witch-hunt going on, and they are trying to understand what this means for them.”

Any serious attempt by China, or the Chinese Communist Party (because they are, after all, one in the same), to punish foreign investors for their economic troubles will lead to an immediate exodus of foreign capital.  Companies and funds with Chinese equities will divest in a flash, as once-trusted Chinese government policies will look more like Venezuela than the United States.  When that happens, the bottom is likely to fall out entirely.   Such would be remarkable in itself, as China is a very large economy on the world stage.  But there is the added and unpredictable factor.  The Chinese Communist Party has for three decades or more tied its legitimacy to economic prosperity.  Should that prosperity evaporate, as is seemingly very possible, the Party may be in a struggle for its very existence.  And when a long-entrenched ruling caste struggles for existence, it becomes increasingly desperate.  Which often causes that caste to look externally to agitate against foreign governments and push patriotism as their means of holding onto the levers of power.  South China Sea, anyone?  Korea, perhaps?

10 thoughts on “The Chinese Economic Collapse”

  1. The economic prosperity that the CCP has brought has lead to the creation of a significant sized middle class. Economic collapse will harm that group. And history shows it is not the elite nor the peasantry that leads revolution, but the disaffected middle class. CCP better hope for a soft landing.

    1. Another factor is the one child policy. Take only boys and get them killed in some self aggrandizing, useless war, and they could also be facing an explosion. The CCP, I think, knows they’d better step lightly or they’ll be dining on ashes.

    2. One has to openly question if the CCP has the understanding of economics to bring about a soft landing. The fear, increasingly, is that they do not. As one analyst I talked to phrased it, foreign investors don’t expect honesty or transparency. But they do expect competence. And the CCP is showing themselves incompetent. And that is very, very bad.

  2. Its not quite as bad as it all seems.
    Well, it is, its worse actually, but its not quite as imminent.

    Chinese Banks are forced to keep 17% of their assets in Central Bank Cash Deposits, a more normal figure in the developed world is 3-5%
    Ironically it was kept so high to slow consumer spending in China, lowering that amount gives them a near instant boost, however it makes the eventual crash all the worse.

    “The economic prosperity that the CCP has brought has lead to the creation of a significant sized middle class. Economic collapse will harm that group. And history shows it is not the elite nor the peasantry that leads revolution, but the disaffected middle class. CCP better hope for a soft landing.”
    Thats actually not the case for China, depending on where you draw the class lines.
    The CCPs authority comes from the upper lower classes, the factory workers.

    The middle classes were badly impoverished by the devaluation policy and made their frustrations known in Tianamen Square. That same policy led to the Agrarian Classes getting Factory Jobs, which are far more pleasant, and the Special State Enterprise thingies making the Party Connected very rich

  3. I would say that they would venture north and try to take the resources in Siberia. Naval warfare is expensive, while sending a couple million conscripts screaming over the hill is much cheaper. It does a much better job of getting men killed as well, which would alleviate much of the pressure from the one-child policy. Putin’s games in Ukraine have also strained the Russian Army.

  4. If China has to pick an external boogie-man that can divert the attention of the Chinese people, I think they’ll pick Japan. Everyone in East Asia has a rich tradition of hating the Japanese (something I picked up on living in Korea and traveling in Indonesia), so the Chinese might feel like that would be the best target for anti-foreigner sentiment. However, a lot of China’s neighbors, including the Philippines, have started to forge closer ties with Japan in hopes that the Japanese will someday act as an effective counter to Chinese aggression.

    Up to now, the Middle East has been the center of attention, but the Pacific could potentially be the source of some real trouble. Stay tuned…..

  5. “Companies and funds with Chinese equities will divest in a flash”

    I suspect it will be longer than a flash as most investors will be reluctant to take actual large losses to prevent taking theoretical large losses.

    1. It depends on how far they think the CCP will go. Full nationalization will result in almost total loss.

  6. I read this about the collapse of the Chinese economy and it brings to light how fickle human nature is. It was only in the last one to two years that I read many stories telling how China was going to bury the U.S. in the next ten years. Some reports stated the U.S. was already behind China and the good ‘ole days were done. Now in the last two weeks I learn that China is in all this economic trouble, and photos showing ghost cities, not towns but cities, that have been in existence for a decade or so. Where were these reports when we were being told that China was burying the U.S. ? As the saying goes, don’t believe anything you hear and only half of what you see.

  7. Sorry ’bout that. Must suck to be looking at a billion (+) angry and repressed citizens with little recourse….

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