Sunday, January 16, 2011

2012 Disaster? The China Bubble

For years we have been hearing two tales about China. The obvious one that China will overtake the U.S. as the dominant economy on the planet and eventually even hold the world' s default currency. Not to mention China's expanding military and its ambitious goals to lead in space exploration among other likely conquests. Who's to stop it? The other tale is the specter of the grand daddy of all "bubbles".

If you have been listening and reading you will have seen the occasional China bubble story. While it seems impossible in the back of your mind you wonder to yourself what will it mean to me...

I've relied on one of my favorite bloggers for specific information, that would be Al Fin of While I find Al Fin extremely credible it doesn't hurt to see evidence in main stream publications. Take a minute to read this article in The Times of London called "Hedge funds bet China is a bubble close to bursting".

We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.”

He is not alone. Hugh Hendry, a former star of Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management.

He follows Mark Hart of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the “key engine for global growth”, China is an “enormous tail-risk”.

There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.

One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.”

More analysts are becoming bearish too. Last week, Lombard Street Research put out a note warning of China’s “already dangerously home-grown inflation”.

The analysts said figures showing the continuing boom in China were far from welcome: “On the contrary, Chinese policymakers have to slam on the brakes.” The financiers are warning that rather than depending on China as the prop of the recovery plan, Britain needs to be braced for another shock.

The housing bubble in The U.S. and to some degree in Europe has caused a near global economic meltdown. It's hard to say what havoc the bursting of the China bubble will do. Nothing good I'm sure.

If one thinks about it the very fact that China became an economic powerhouse is intrinsically tied to the American housing bubble. Through the 80's and 90's technology, computers, the Internet and the digital device revolution helped keep the U.S. economy afloat. First it was the manufacturing of the devices and later, when the manufacturing went overseas, the servicing of the technology culminating in the Y2K economic boom. Thereafter it was the housing market and the wildly inflating real estate prices forged by bad government policy and ridiculously low interest rates that fed the economy the equity capital that would float the economy for a few more years. All the while the jobs flooded out of the U.S. and into China with the blessing of the multi-nationals as well as the Federal government. U.S. consumers flush with all that home equity money bought a lot of Chinese manufactured goods.

Let the good times roll, right?

Where does that leave us now. Well, does a sustained (official) unemployment rate of nearly 10% ring a bell? Does record bank foreclosures sound familiar? Do bankrupt state governments and multi-trillion dollar Federal deficits come to mind? Bad, yes, all bad, but thank God we have cheap Chinese imports at WalMart!!!

If the Chinese bubble bursts we could actually see shortages of some basic supplies since they are not made here anymore, but that would be the least of our worries. Many companies would be hurt and it could cascade into more job losses here, maybe even enough to send us into a deep recession or even a global depression.

No one really knows what might happen. These hedge fund managers, some of whom were ringing the warning bells about the U.S. housing bubble, will point out the canaries in the coal mine for us - we should listen this time.