The China Syndrome: Global Meltdown

KINGSTON, NY, 29 July 2015—By any measure, the Chinese equity markets are in turmoil. The Shanghai Index, up 150 percent in a year and down some 30 percent since mid-June, was hit hard again Monday, losing another 8.5 percent — its second-biggest fall in its history.

The selloff continues despite weeks of unprecedented market-rigging stimulus measures by the Chinese government. They include pumping in more than $200 billion to buy failing shares, restricting short selling and halting trading of nearly 50 percent of stocks on the Shanghai Composite. Although hundreds of stocks have resumed trading since the restrictions were implemented, 126 are still blocked from trading.

Not only are its equity markets shedding trillions in investor losses, Goldman Sachs estimates some $225 billion of capital has flowed out of China in the second quarter.

But the word on Wall Street is that China’s steep market decline is just a correction, it won’t affect its overall economy, it’s a non-event on the grand scale and worries it’s signaling a worldwide market meltdown are overblown.

It is extremely difficult to forecast China’s stock-market trends, considering the overt and unprecedented rigging by the Chinese government whose stated goal is to stabilize and ultimately increase stock prices.

However, we can forecast with certainty the fears of a global market panic extending far beyond the strength or weakness of China’s equity markets.

As we wrote in last week’s Trend Alert, the world’s second largest economy, “China – in midst of an economic slowdown, an equity market calamity and trying to keep its real estate bubble from bursting – absorbs some 50 percent of copper, iron ore and coal exports. Thus, nations rich in commodity resources, such as Canada, Australia, Brazil, Venezuela, Peru, Russia, Nigeria, Angola, Chile and Indonesia, are in recession or heading into one as demand for their exports declines worldwide.”

China Syndrome

It’s a fact. Commodity prices have crashed and a corresponding currency crisis are clear trend lines leading to more than just stock market mayhem; it portends global economic turmoil and social/geopolitical instability.

The Bloomberg Commodity Index has fallen to 2002 levels and, along with falling prices, so too have currencies of resource-rich nations that mine and export those commodities. For example, Canada’s loonie has plunged to 2004 levels against the US dollar. The Aussie dollar and Mexican peso are at six-year lows. Brazil’s real is at 12-year lows and Indonesia’s rupiah is trading at 1998 levels. Even oil-rich Norway’s krone, which is pegged to the euro, is down nearly 10 percent since May.

It’s a very simple formula: When the United States and Europe buy fewer consumer goods, China manufactures less of them. And the less China manufactures, the fewer raw materials and agriculture goods they import from resource rich nations. As exports decline from resource rich nations their economies grow weaker, their currencies fall lower and the risks for social unrest and global stock market turbulence increase.