China Risk To World Economy

A rejected rally is very much what yesterday’s Wall Street price action looks like.

The micro on price action is very important at the moment as there is already significant pain out there in the investment community, and people are looking for clues as to whether this is just another short term consolidation phase or perhaps something bigger?

We were hoping for China to begin its soft landing a lot earlier than here, and still no airport in sight to support such a scenario?

China GDP qoq

The China slow-down is hitting the global headlines in a big way now, and that they cancelled the publishing of the youth un-employment level is particularly concerning. That move of course confirms the economy is still headed south and un-employment much higher.

Historically speaking, a soft-landing has never been more important. China created the biggest economic miracle and modern consumer society transformation of all time. As in all bull markets however, there is always a significant correction. This is what has now taken hold. The ultimate correction to that boom of two decades.

What we and the world do not want to see is a correction that is proportionate to the bull economic run. That indeed, could be akin to the severe corrections seen in the US economy. Such as the GFC period or worse.

In many ways China is already in that style of moment. Bankruptcies of top tier Financial institutions are now occurring and several more big names are at risk. It is actually good of China policy makers to be allowing market forces to grip these institutions. It was interesting that when lowering interest rate settings recently there was no movement on the 5 year rate.

This may of course change very quickly over coming days as things look to spiral quite dramatically.

A soft landing is of the utmost importance for China in terms of social adjustment, and also for the rest of the world where a more severe contraction in the economy would in fact cripple the global economy too. China has been the dominant contributor to global growth, above that of the USA, for most of the past two decades.

Areas of Latin America and even Africa are showing increased potential to self-drive in much the same way as many Asian economies. Yet, all are in the end to a significant degree dependent on China’s economic performance.

The West needs China to figure this out, and as the masters of best economic policy over several decades it is hoped they still have their touch.

This is a crucial historic moment for China. To soft-land post the most spectacular economic expansion in history, is crucial to the health of the global economy.

US stock markets were already shuddering a little from having become a little over-heated relative to their own economic challenges. A more serious slow-down in China could derail hopes of a resumption of the previous strong half year in stocks.

With the economic matrix globally being as I have said before, more problematic than at any time in my several decades in markets, it can only be suggested at this point that investors remain mindful of the current downside risks. To both property and equity market pricing.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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