China’s Implosion Could See Re-Run Of Great Depression

WARNING THE FOLLOWING MAY CONTAIN INFORMATION AND OPINION THAT SOME MAY FIND DISTURBING:
So much for our robust economy, but what about a speedy recovery?      The bursting of the commodities bubble and a softening Asian economy on top of a sea of personal debt doesn’t make for a robust economy.  But that’s not the really bad news.

First, some really bad news about our export market:

China steel lockdown hits exports

DOZENS of freighters carrying Australian iron ore are stalled outside Chinese ports amid a collapse in demand for steel, dashing hopes that Chinese industrial demand will protect Australia from the worst of the global recession.

Tumbling Chinese exports and renewed stock market lethargy indicate that efforts by Chinese leaders to defy the global economic crisis are struggling.

Instead of being used in new office buildings, factories and bridges, steel is being stockpiled, driving an 8.6 per cent fall in Chinese steel prices in the past fortnight.

The situation bodes ill for pivotal annual iron ore contract negotiations between Australia’s big iron ore miners and China’s steel mills.

The emerging weakness in China will weigh on the Reserve Bank board, which is meeting in Sydney tomorrow to consider a recommendation from the RBA management to halt its run of interest rate cuts.

Although Chinese authorities hope they can hold the decline in the country’s growth rate to 8 per cent, the IMF is forecasting 6.5 per cent and private analysts are suggesting it could be considerably lower.

In January I posted this prediction Societe Generale strategist Albert Edwards, which pointed to major problems with the Chinese economy and the implications globally, especially for the US:

Super bear warns on US and China

“In 2009 it is not the mounting risk of depression in developed economies that will come as a major surprise,” Mr Edwards wrote in a note to clients, “it is economic implosion in China and the global and geopolitical risk thereof.”

In forecasting a depression in the US, Mr Edwards means that he believes the US will see a peak-to-trough decline in its gross domestic product of more than 10 per cent.

In China, Mr Edwards expects the worst domestic upheaval since the Tiananmen Square protests in 1989 may cause the Chinese authorities to undertake a “mega-devaluation” of the Chinese currency, the yuan, in an effort to stay in power, as “the very survival of the regime depends on growth”.

A devaluation of the yuan would cause the rest of the world’s economies to competitively devalue their own currencies in response, Mr Edwards said, sparking a “1930’s-style trade war” that “could see a rerun of the Great Depression”.

Only last week I indicated the importance of US and China relations and the important role China plays in supporting US efforts to stabilise their economy:

Clinton’s recent visit to China is SIGNIFICANT

Posted on

Secretary of State, Hillary Clinton’s recent visit to China is a significant event in U.S – Chinese relations and the implications are sure to effect the future direction of the global economy and world markets.

Global markets have every reason to be jittery. In the last few years, Japan  and China have bought into US treasury bonds and hold large significant US currency reserves. Why? To keep the value of the dollar high so the US can continue buying lots of their exports. What would the dollar be worth if they were not propping it up? What will it be worth when they can buy no more?

This seems to be the question being asked by investors on Wall Street

What does this all mean? If the Chinese economy implodes the consequences will have far reaching effects on the global economy and financial markets, not to mention the potential political upheaval it will cause.

We’ve seen our largest trading partner, Japan’s economy tank and now if our resource exports to China should fail badly, there’s little room for our government to successfully guide us into calmer waters.

I sincerely wish I were seeing it in a more optimistic light but it’s simply not the case at the moment.   All we can do now is cross our fingers and hope China’s fortunes turn.

Over to you

UPDATE: ASX HITS 5 YEAR LOW

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17 Responses

  1. ASEAN+3 moves to cushion financial meltdown

    ASEAN+3 includes the 10 members of the Association of Southeast Asian Nations (ASEAN) — the Philippines, Indonesia, Thailand, Malaysia, Singapore, Brunei, Vietnam, Myanmar, Cambodia and Laos — as well as three East Asian nations — Japan, China, and South Korea.

    The group has a total population of 2 billion, a combined gross domestic product (GDP) of $9.09 billion, and foreign reserves of $3.6 trillion. Therefore, ASEAN+3 represents one third of the world’s population, 16 percent of the world’s GDP, and holds more than half of the world’s reserves.

    As the first concrete joint action in Asia to cope with the global economic downturn, the foreign exchange reserve pool is accessible to members in a swap mechanism to boost their foreign exchange reserves and for addressing short-term liquidity problem.

    Members in dire need of the foreign exchange reserve fund, however, will be subject to an independent surveillance mechanism by other members. A concrete arrangement of the surveillance will be decided during the upcoming ASEAN meeting in Bali in late May.

    A surveillance by the member countries is preferred because most of the ASEAN+3 nations have suffered a traumatic experience from tapping financial support from the International Monetary Fund (IMF), which is regularly tied with seemingly unfavorable and ineffective terms and condition.

    After the surveillance mechanism becomes fully effective in its function, members can use more of the fund without having to worry of being put under the IMF supervision. Under the existing rule, members withdrawing the fund by more than 20 percent of their real need are required to have IMF supervision.

    Asian countries expand FX protection

    Speculative attacks and capital flight devastated the foreign exchange reserves of Indonesia, Korea and Thailand during the Asian financial crisis a decade ago, prompting recourse to loans by the International Monetary Fund and hence the imposition of IMF “conditionality”. This was a set menu of measures that combined fiscal austerity with monetary tightening, and a reduction in state subsidies with the lifting of import barriers. Together, these measures led to social and economic hardship for households, and forced domestic companies into fire sales of their assets to foreign, especially US, buyers.

    Although IMF loan conditions apply to 80% of existing bilateral swap agreements, the ministers hinted that they might not be attached to the new scheme. Perhaps it would be a little perverse if they did. After all, countries throughout the world, led by the US and Western Europe, who championed conditionality when it could be forced on others, are rather less enthusiastic to take the same medicine when they themselves are ailing.

    Instead, they are planning and implementing ever larger stimulus packages as well as bank and corporate bail-out programmes; moving towards “quantitative easing” (that is, printing money); advocating covert protectionism; providing safety-nets for its most vulnerable members; and they are also busy nationalising instead of privatising key industries. The Washington Consensus seems to have been turned on its head.

  2. I’m trying to stay a little more optimistic than you John (Swimming against the tide perhaps?)

    China tipped to recover in second half of 2009

    Although I will admit, the heading of the article is much more upbeat than the contents.

    Also, reading the ‘super bear’ aticle you linked to, I read about his measuring of China’s electrical power output, and wondered how much this could be attributed to slowing economy, or a greener form of electrical production? It is probably nothing, as I would assume that is taken into consideration, and after seeing an almost empty factory that is normally full of our wool on some show recently, I would guess he is right.

    At least we have insulation to make from all that excess wool now.

  3. Tom

    There’s more than a little wishful thinking going on around the globe as far as China is concerned – China’s ability to recover and prosper is in fact central to a global recovery.

    The fact is we conveniently deny just how secretive the Chinese are.

  4. Legion

    “ASEAN+3 includes the 10 members of the Association of Southeast Asian Nations (ASEAN) — the Philippines, Indonesia, Thailand, Malaysia, Singapore, Brunei, Vietnam, Myanmar, Cambodia and Laos — as well as three East Asian nations — Japan, China, and South Korea.

    The group has a total population of 2 billion, a combined gross domestic product (GDP) of $9.09 billion, and foreign reserves of $3.6 trillion. Therefore, ASEAN+3 represents one third of the world’s population, 16 percent of the world’s GDP, and holds more than half of the world’s reserves.

    As the first concrete joint action in Asia to cope with the global economic downturn, the foreign exchange reserve pool is accessible to members in a swap mechanism to boost their foreign exchange reserves and for addressing short-term liquidity problem”

    The facts are extremely daunting aren’t they? Thanks for the links.

  5. Tom

    Lol Yes, and the upside is:

    “At least we have insulation to make from all that excess wool now.”

  6. Tom and Legion

    This helps put our own woes into perpective

    Millions of Chinese migrant workers lose jobs
    http://www.theaustralian.news.com.au/story/0,25197,25123430-28737,00.html
    Article from: The Australian

    LAST week’s announcement by Pacific Brands that 1850 Australians were to lose their jobs to China spread gloom among workers at large-scale local manufacturing industries. But in reality Chinese migrant workers are faring much worse. More than the equivalent of the whole population of Australia, 20-30 million people, have already lost their jobs and thus also their housing in the factory towns.

  7. It’s worth noting Soros’ relative optimism about the role of China, India and oil producing countries providing a counter- trend back in February 2008. He states:

    “Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong counter -trend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

    The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.”

    But then, there’s the warning about political tensions and the resulting attitudes that could make things much worse.

    He obviously didn’t see the potential for trouble brewing within the Chinese economy itself, which suggests his concerns now would be much more dire than even he had previously thought. In fact, large portions of investment funds from around the globe have been focused on China’s economic strength which will now be hastily reviewed no doubt.

  8. JMc

    I have had no doubt for some time now that this crisis will turn out to be the world’s worst financial disaster – far greater than the Great Depression…and none of us are safe…

    There are a number of things that concern me:

    1. Our own government and opposition trying to score points rather than recognising that we must fight this crisis (it is so much more than a “crisis”) as a nation.

    (Unfortunately – as opposed to Mr Springborg’s {LNP}interpretion – it should be tackled as if we were at “war”).

    2. General complacency in the general population, a slowness to comprehend what is about to descend upon us

    3. The sheer ignorance of most of the media

    4. No real urgency on the part of world governments to change anything, or unable to. Instead of urgent meetings “now” (eg G7, G20) they will be on pre arranged dates

    5. The sheer arrogance of banks (and others ie Pac Brands and their contempt for society and obsession with making money rather than corporate citizenship, particularly in times of massive change and the suffering that it will bring

    6. Is China playing a dangerous brinkmanship game to finally control the world

    7. The selfishness and ill discipline of societies these days could lead to a rapid escalation of civil unrest as the scenario unfolds

    8. History is repeating itself and that inevitably this shift of power will mean global armed conflict – the have nots will want to take what they need. A quick read of the history of Hitler’s rise to power and “why” would be appropriate for anyone interested…

    …a strong move towards nationalism by countries (ie abandonment of “global” trading) will be the first indicator – this is, for instance, the first real test of the EEC – let’s hope it passes…

    …we have Putin rattling his sabre in Russia…

    …North Korea playing with missiles…

    …Iran developing nuclear weapons…

    …and nobody really knowing what China is up to…

    This is not just about the financial system and capitalism but has far reaching political implications that will change the way we all live…democracy may be coming under threat again…

    The one little star I see, is that China (or more correctly its people) have tasted capitalism – and they like it…Chinese students have – over a number of decades now, demonstrated their (and the general population’s) dislike of the single party political system…

    …maybe out of all this a new model for society may be born a – democracy, with a government controlled command system for essentials (ie basic food, shelter) underpinned by well controlled capitalism for growth…

    …if history repeats itself, China may be due for another civil war (ie the Spanish Civil War just before WWII) that will have serious repercussions throughout the world…

    Is that the sharpening of blades and the squeak of the tumbrills, I can hear, in the winter air!

  9. “the most effective way we can help somebody living in the third world to crawl out of poverty is allowing them to move to the first world.”

    http://www.watoday.com.au/opinion/despite-job-fears-we-must-keep-migration-door-open-20090301-8ld4.html?page=1

    This is the type of stupidity we have to deal with when discussing immigration (illegal and legal) during such times. He is still thinking about “global welfare” when Australian’s are feeling the pain. He should explain his world view to the carpenter who has seen his wages shrink and eventually his job disappear. Seems Rudd has finally come to his senses at least. To the bitter end this idiot uses the same old scare tactics without mentioning any of the realities. For instance “skilled visas” being routinely used to bring in low skilled labor instead of the jobs for which they are intended. The guise of the “temporary worker” is another classical farce, anyway…The data contradicts this guy’s rhetoric in the US at least but still he beats the drum……

    I have always been a staunch critic of the global economy and perils it holds. In essence, Western consumerism fueled the “artificial” growth of the third world via artificial wealth in the form of credit here in the West. This worked fine until the credit dried up and the debts became too much. No economy, including the mighty China is immune to this cycle, especially when are economies are now so intimately bound. BO and Rudd are just prolonging the unsustainable with these stimulus plans, nothing more. Time to get back to the basics Australia and none will be able to do so without going through the pains of such a transition. The politicians on both sides of the pond know this but continue to feed the gullible masses with false hope…….politics at its worse!

  10. TB and Sparta

    Excellent points.

  11. These loss figures are absolutely mind-boggling

    http://business.smh.com.au/business/markets/us-bear-market-has-two-years-to-run-options-suggest-20090302-8lyo.html
    Options investors are paying twice this decade’s average to protect against losses in US stocks through 2011, signaling the bear market that already wiped out $US10.4 trillion ($16.4 trillion) of equity value may last two more years.

  12. Sparta and TB, you’ve expressed what I’ve been thinking. What’s happening now puts me in mind of the “phony war” between September & December 1939, when people, with a few notable exceptions, believed that the war would be short, sharp and shiny and then it would be business as usual. If only….

  13. Wayne Swan is doing his very best to remain upbeat in the face of mounting concerns. Look on the bright side, we may be in for more rate cuts despite potential inflation problems – what else can you do in a situation like this.

    http://www.theaustralian.news.com.au/story/0,25197,25125550-601,00.html
    TREASURER Wayne Swan has warned that Australia’s economy will be hit as our major trading partners slide into recession.

    http://business.smh.com.au/business/rates-set-to-fall-as-gloom-worsens-20090302-8lv6.html
    The Reserve Bank of Australia is tipped to cut interest rates to a record-low level tomorrow as the effects of the global downturn threaten to derail the domestic economy.

    However, the impact of the recession sweeping the world has left economists divided about how deep the RBA will cut.”

  14. Also under increased pressure and risk of implosion is many Eastern European countries.

    New economic Iron Curtain to divide Europe’s rich and poor
    http://www.theaustralian.news.com.au/story/0,25197,25126333-601,00.html

    EASTERN European countries gave an apocalyptic warning yesterday of hordes of unemployed workers heading west as a new Iron Curtain divides rich from poor inside Europe.

    Twenty years after the fall of the Berlin Wall, Western leaders were told yesterday that five million jobs could be lost in the “new” European Union countries of the East unless radical action were taken to bail them out.

    The spectacular collapse of some of the post-communist tiger economies led to demands at an EU summit in Brussels for a rescue fund of €190 billion ($377 billion) to stop social collapse in the Eastern nations spilling over into the rest of Europe.

    The plea, led by Hungary, was rejected in a bad-tempered meeting of the 27 European leaders, dominated by fears that Western EU countries would rather prop up their own large industries and jobs at the expense of the East.

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  16. Pretty drastic shrinkage

    China’s trade surplus shrinks as exports plunge
    http://business.smh.com.au/business/world-business/chinas-trade-surplus-shrinks-as-exports-plunge-20090311-8uwt.html
    China’s exports plunged a much steeper than expected 25.7% in February from a year earlier, in a dramatic sign of the depth of the global slowdown.

    The world’s third-largest economy last month posted exports of $US64.9 billion ($100 billion), the customs bureau said today. Imports last month dropped 24.1% to $US60.1 billion.

    The resulting trade surplus was $US4.84 billion, compared with $US39.1 billion in January and a record $US40.1 billion in November, the customs administration said.

    Economists had on average expected a $US27.3 billion surplus based on a 5% fall in exports and a 25% drop in imports from year-earlier levels.

    “This is clearly worse than expected,” said Robert Subbaraman, a Hong Kong-based analyst with Nomura International. “We were looking for a rise (in exports) of 1.2%. The market consensus was looking for a rise of 1%.

  17. John;

    One of those sentences bears reading carefully:

    Economists had on average expected a $US27.3 billion surplus based on a 5% fall in exports and a 25% drop in imports from year-earlier levels.

    How much was the fall in exports?
    How much was the fall in inports?

    Que???

    And they cannot afford to buy our iron ore exports, but they can afford to buy our iron ore deposits?

    Que???

    Wakey, wakey!!!

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