China’s Pending Lehman Moment Will Collapse World Markets
With billions of dollars taking their leave of the country, China could be facing a Lehman moment. If this happens, world markets may collapse. The global stock markets recently entered panic mode when shares plummeted in Europe and Asia for the second day in a row. This situation sparked fears that the global economy may be headed toward a recession.
A Lehman Moment in China will Take the World Markets Down with It
In 2015, $674 billion left China while 2016 has already seen the country lose another $175 billion. The Institute of International Finance released a recent report predicting that $538 billion will depart China by the end of 2016. As of February, reserves have sunk from $4 trillion to $3.2 trillion. In addition, the majority of these reserves are illiquid, so China cannot use them to stabilize its currency.
Wolf Street reports that one area of unpredictability is the amount of reserves that the Chinese government deems vital. If reserves decrease lower than that level, officials could permit the yuan to plummet, or they could decide to constrict currency controls even more.
At the moment, the only thing that Chinese officials seem to be focused on is short-term stimulus regardless of how destructive or ineffective it may be over time. Authorities appear to be working overtime to keep their elaborate economic construct from blowing up. There are those in the industry who believe that if the People’s Bank of China floods the country’s banking system with funds, the nation will continue to hold off a financial crisis. If this fails, then China is likely looking at a Lehman moment, which could bring about a world market collapse.
Adding Fuel to the Fire
Potential bond defaults are adding fuel to the growing fire. In China, companies have been lending funds to each other. If bond defaults become commonplace, the evasion would reverberate through corporate China.
Officials hope that by overindulging in credit, they will be able to stimulate a declining economy and conceal the country’s structural problems, overcapacity and abundance of debt as well as a massive amount of problem loans. However, during the first quarter, China’s total foreign and domestic debt escalated by 6.2 trillion yuan. This amount is the biggest quarterly jump that the nation has ever seen, so the increase in credit may be failing to stimulate the economy.
Rodney Jones, a leader at Wigram Capital Advisors in Beijing, compared China’s current economy to the one that the United States experienced due to the subprime loan catastrophe in 2008. He said, “Chinese banks are using investments in wealth management products to disguise corporate loans as financial debt.” According to his estimations, China’s debt to gross domestic product, or GDP, ratio was around 280 percent toward the end of 2015.
Is a 2008 Financial Déjà Vu on the Way?
Investors have been dumping shares in favor of safer assets like government bonds and gold. The Guardian compares these conditions to the ones that were in place just before the Lehman Brothers collapsed in 2008, which thrust the world economy into a recession. Fear about China’s current economic growth problems combined with plummeting oil prices are already causing markets to tumble.
Speculation about the world’s biggest economy reacting to weakness in the global markets by increasing interest rates is also triggering alarm. If the U.S. Federal Reserve increases interest rates, then investors may react even more aggressively when it comes to moving money out of the stock markets. This will increase the likelihood of a world market collapse.
The alarm bells aren’t exactly coming from China’s debt numbers. Instead, industry insiders have expressed concern about the speed at which the country’s debt has grown. Ha Jiming, the chief investment strategist for Goldman Sachs, said, “Every major country with a rapid increase in debt has experienced either a financial crisis or a prolonged slowdown in GDP growth.”
Evidence of a Lehman Style Crash
Business Insider reports that a Lehman style crash in China is on its way. It can be seen in the nation’s economic numbers. For instance, China’s electricity consumption rate grew by less than 1.5 percent last year. In addition, the country has shrunk its commerce dealings with the outside world drastically. Reports show that its imports are down by 23 percent while exports are off by 3 to 6 percent.
If China can’t pull its economy together, then it will likely crash, and this crisis would be big enough to impact world markets. For more information about China and its economic similarities to the financial crisis caused by the Lehman Brothers, visit the PersonalMoneyStore.com.