Events In China & Greece Threaten 2008-Style Credit Freeze
The stock market crash in China and Greece’s probable exit from the euro threaten to cause an October 2008-style credit freeze. This led to a plunge in global trade in the first half of 2009 with volumes down around 40 per cent in Dubai, the Middle East’s biggest port.
China is a bigger problem than Greece. It’s stock market crash has already cost the equivalent of ten times Greek annual GDP. This was the final stage of the credit bubble in China that started in 2009 with an epic bailout package equal to half its GDP, the biggest in history.
That this should climax in a 1929-style bubble and crash in its stock market was inevitable. But we still have to deal with its consequences. Chinese domestic demand will now collapse with the funding for its continued expansion.
It’s a ’sudden shock’ experience that Dubai saw in 2009-2010, a very painful and immediate end to a long period of prosperity. Credit will become far more expensive in China, just as Dubai bond yields went through the roof.
But this just is not good news for anybody. China has become an important trading partner and source of investment for many nations. They will all suffer in the wake of the stumbling giant.
Will its 100 million plus tourists now stay at home? How will its companies raise the money to build projects in Africa? How much lower will industrial commodity prices go if Chinese demand is shot to pieces?
In so many markets the weakness in demand from local sources has been compensated by demand from the temporarily super-rich Chinese buoyed up by a bubble economy. They are going to have to go back to being poor, at least for as long as it takes to sort out this mess.
History does not have many examples of quick recoveries from sudden stops. The US did not really recover from the Wall Street Crash until its belated entry into the Second World War.
True Dubai turned its real estate crash and debt crisis around in a few years. But this was a much smaller economy with rather special local factors plus the support of Abu Dhabi and a surge in oil prices (click here).
However, those economic analysts who see Chinese stocks as somehow an isolated phenomenon with no impact on the global economy are very misguided. Without the planned tsunami of IPOs to raise new cash in China, bond yields are on the way up and there will be a credit squeeze.
Europe’s problems with Greece of course don’t help either. This is going to put the cost of borrowing up in other nations like Spain and Portugal that might be the next to leave the eurozone.
Indeed, what we are seeing is an end to the days of easy money that have supported global financial markets and powered stock markets to spectacular levels absent any real economic recovery. And the Fed has not moved rates an inch. It won’t be able to either.
This is the start of a crisis for both bonds and stock markets in which gold and silver will be the only winners as the final or ultimate asset bubble. Getting the timing of this right is absolutely impossible, and it would be foolish to try, just as it is utter folly to bet against this trend.
Peter Cooper is the editor and publisher of ArabianMoney and a 20-year veteran of Dubai business journalism.
Peter Cooper is the editor and publisher of the ArabianMoney investment newsletter and the popular financial comment website www.arabianmoney.net