Predictions are always risky to make.
When will the stock market collapse?
China seems to be on a solid track …..for a hard landing.
Sooner than later, China is going to experience its own version of bubble collapse.
If you were not Chinese, and do not live in China, should that concern you?
Yes….very much so.
The world now is like a small village.
What happens in China, which is the second super economic power, will definitely affect the rest of the world.
The “Domino Effect” will be strong.
The IMF has recently sent a very clear message to China that it is going to experience a hard landing.
Maybe not a landing…….a free fall!!.
That simply means, China is going to have a major financial fiasco.
And Chinese authorities are doing very little to take that into consideration!
Many economists argue that China is actually not taking serious measures to avoid that collapse.
If that hard landing happens, as I expect it within a year or 2, will that create its negative repercussions on world financial markets?
One major effect will be the limited ability of China to buy US treasury bonds.
Currently China is the biggest buyer of those bonds, and in a way it is financing US fiscal deficit.
That will have its negative effects on America’s economy, besides the added possible collapse of American stock markets in Wall Street & Nasdaq.
Another “shock wave” would be Chinese sovereign funds.
China has already 4-5 mega funds invested in major world financial markets, and it is estimated that these funds are about $1.5 trillion in value.
Once China experiences the domestic collapse of its markets, the Chinese government would rush to draw funds from its sovereign funds, and this would only exacerbate the effects.
China will copy the Japanese model of 1989 when stocks & real estate bubble exploded.
What is different and more damaging to China, is that its economy is still heavily dependent on production.
The production sector is by far the biggest component of its economy, which means its economy has not matured enough to accommodate a larger services sector.
That possibility is scary, especially given the fact that the west & the world can only watch it happen.
If China collapses financially will that be good for the west and the world?
In the short run, Chinese exports would be cheaper, and this is good for the USA in particular, because it runs huge monthly trade deficits with China.
However, in the medium run, that is not good even for the USA, and worse even for Europe.
As the USA & Europe are coping and recovering from 2008 depression, they can not afford another big financial blow.
The US is relying heavily on selling its Treasury bonds to China, so as to finance its increasing debts.
European financial markets are attracting a lot of Chinese sovereign capital, and a big withdrawal would be painful to its fragile recovery.
World financial markets became more inter-connected and inter-dependent.
That means only that the “Domino Effect” would be stronger and more negative.
Chinese officials, instead of considering and listening to those suggestions by world organizations, are taking hostile positions against them.
China is not aware of its potential problem.
Even if China becomes alert to this developing situation, it definitely can not find a solution for it.
The political system in China is purely communist, yet its financial system is mostly capitalist.
Can you imagine a communist trying to fix a capitalist financial problem?
History repeats itself, many times, and in many places.
China is no exception.
What do investors have to do?
Cut down their stock holdings.
Some investors may short sell their stocks, but that is also risky because no one knows for sure when that collapse will happen exactly.
We are back to old random walk theory.