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?