The following chart courtesy of BAML helps to illustrate one of the reasons why China has a big problem on its hands:
The PBOC (People’s Bank of China) has been complicit in doing everything pump up China’s stock market bubble which, after nearly tripling in less than a year, burst a couple of months ago.
Interest rate cuts tend to offer a short term transitory benefit as they do not address the core of the problem, which is structural in nature. China is experiencing a steady downtrend in GDP growth labor productivity while simultaneously futilely trying to combat this problem with ever increasing rates of investment expenditures. The following clever graphic courtesy of Bond Vigilantes illustrates the significant risk which China currently faces:
The trends in China’s GDP growth and fixed investment as a % of GDP have some eery analogs with massive bubble blowups of the recent past; ranging from Thailand in the 90s (which set off the “Asian currency crisis” of 1997) to Iceland and Spain in the 2000s. Needless to say it is a scary proposition that the world’s 2nd largest economy is following a dangerous path that has historically led to disaster for other countries.
The Chinese government has done everything it can to protect, and inflate, the Chinese equity markets since the initial bubble burst in 2007. Now that the 2nd Chinese stock market bubble in less than a decade has burst, it’s increasingly difficult to envisage how things don’t get a lot worse before they get better.
It is this harsh outlook which has weighed heavily on the commodity complex and recently even begun to drag down blue chip Wall Street stocks that seemingly have little to do with the ups and downs of China’s economy. However, in the 2015 globalized world everything is correlated to some extent.
A couple of things are fairly certain; we can expect more central bank policy responses in the coming months and more volatility across global markets.
Bond Vigilantes – China’s Investment/GDP soars to a totally unsustainable 54.4%. Be afraid.