Greece and Italy have been stealing economic headlines these
days.
The media has been so focused on Greece and its pint-sized
economy, that they have completely missed what should really be headlining
world economic news…the slowdown of the world’s second-largest economy.
China’s government-induced GDP growth and red-hot housing
market have both stalled. Ironically,
the government itself caused the slowdown, as it introduced prudent anti-bubble
measures throughout the year. Such
measures were an unfortunate necessity: without them, inflation was turning
rampant. But now the slowdown may turn
out to be just as devastating. And, it
seems that the largest companies in the world are well aware of what is coming.
Last week, Goldman Sachs sold $1.1 billion worth of its
shares in Industrial and Commercial Bank of China (1398.HK). This week, Bank of America announced it was
selling the remainder of its shares in China Construction Bank (0939.HK) – $6.6
billion worth.
Today, the International Monetary Fund announced that
Chinese banks could suffer “huge losses” on the very extreme case that credit
shock, currency shock, and yield curve shocks were to occur together. Interestingly, this “slim and rare
occurrence” appears to already be starting.
The IMF's Jonathan Fiechter stated rather bluntly stated (as far as economist-speak
goes) that "while the existing structure fosters high savings and high levels of liquidity,
it also creates the risk of capital misallocation and formation of bubbles,
especially in real estate."
In other words, the current government’s financial policies force people
to invest in real estate (since buying other asset classes in China is
considered too risky), and, banks are lending too
much to capital projects with no economic future (again based on government
direction).
One could say that
the Chinese economy is a centrally-controlled “our government knows better”
economic marvel mess.
It is my advice -
stated on several occasions previously - that you follow the lead of Morgan
Stanley, Goldman Sachs, and Bank of America; that is, sell all but your very best
Chinese holdings.
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See also:
China faces grim foreign trade outlook
China's property cost curbs to remain despite home price drop
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