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starbucks4ever (98.50)

Does anyone have an opinion as to what effect the collapse of China will have on the overall market?

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November 20, 2009 – Comments (9)

This thought has occurred to me frequently in the last few months. Right now, I'm not sure what the correct answer is. I can make an argument that S&P will go down but I can just as easily take the opposite side of the argument. One thing I'm sure of: it will have an effect one way or the other. Therefore I expect that volatility won't disappear and the market will remain an exciting place for the next few years. Just how exciting and in what particular way - that is the question. I want to collect OPOs - Other People's Opinions - first, and then maybe I'll give it some more thought and then formulate my conclusions. So here is my question to everyone: Chinese economy will collapse in the next few years. What will then happen to S&P?

9 Comments – Post Your Own

#1) On November 20, 2009 at 1:12 AM, dibble905 (< 20) wrote:

Collapse? Depends on your definition.
Of the most probable, there is potential for 1) an asset bubble and 2) declining exports due to international pressures to increase the Yuan's valuations.

For case 1), the initial effects may largely be domestic as foreign companies are largely not involved in residential and commercial properties in China. Pressure on Chinese banks and Mortgage Backed Securities equivalents will be inevitable. As property prices decline, development will decline along with it their imports of capital goods will decline significantly as well -- Japan will be in quite a bit of trouble as this is currently fueling their recovery. How this would translate to other markets? Most likely initial panic and selloffs of emerging markets and Japan/surrounding areas -- but it will of a much smaller scale than what we saw in September 08 to March 09 for the world markets. I can see panic, but I do not see huge swings in fundamentals for the entire world.

For case 2), this really depends on how much growth their domestic consumer market grows between now and when this occurs. But as of right now, the ball is in China's court in terms of their Yuan valuation -- they will not get bullied into some forced appreciation. When the time comes, and it will, there will most likely be a shock to the markets as buyers and sellers figure out whether this will make the entire world worseoff or betteroff. The answer is somewhere in between. My bet is, when this does occur, China's domestic consumer economy will be sustainable and the declining export demand would be subdued. At the same time, the appreciation in the Yuan would boost imports (exports for the countries like USA, Russia, Brazil, Japan and Australia) significantly. The net effect, which will play out over a very long period, will determine whether we, as the world, are better off -- this will introduce some volatility to the markets. Either way, the winners will be the other countries -- but at the same time, it will fuel upside earnings surprises to those markets and also increase the value of Chinese ADRs. I can see more positive effects than negative at the end of it all.

So to answer your question... An asset based collapse would create some domestic havoc for China's young financial sector but it will most likely translate to smaller effects internationally -- namely, declining capital goods exports for Japan and surrounding areas. A currency appreciation driven export collapse would not likely happen as the currency appreciation will occur when the Chinese government decides they are capable of sustaining such an impact -- They will make it absolutely sure that any short-term impacts will be mitigated by improved long-term benefits for China.

I am not suggesting a China collapse will not happen. In fact, it is most likely inevitable to some degree somewhere down the road. But, it would be more of a "correction" than a collapse. Don't bet the house on this. I know I wouldn't.

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#2) On November 20, 2009 at 2:08 AM, Tastylunch (29.42) wrote:

If China's market were to collapse I'm absolutely our market would too. We are too closely linked at the time being

If nothing else panicking private Chinese investors would likely dump their commodity hoard which would hurt our major commodity producers who have been helping drive our market up.

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#3) On November 20, 2009 at 2:22 AM, prose976 (< 20) wrote:

Unless China makes a 180 on its domestic and economic policies, their entire infrastructure and the "China Miracle" is going to more like a nightmare.

Let's face it...Europeans, South Americans, Africans, and North Americans do not want to move to China.  It's a communist country through and through, and there is no real opportunity there unless you're already an economic/industry giant somewhere else in the world.  The standard of living is the bottom rung.

If the Chinese government makes any rash changes, it will get very expensive there very quickly, and there will be social upheaval.  They've got a worse situation there than we do here, IMHO.

The collapse of the China Market will have a great affect on holders of Chinese assets, which means most of the world, because everyone is looking to China to somehow lead the world out of this recession.  Problem is, the asset bubble which is being formed is similar to the Great Depression scenario, but, because the whole world is investing in China, waiting for China's own people to justify and start buying into the build-up over there, I believe it's not going to be pretty.

China is an export nation.  It has two classes - the Ruler class and the ruled masses.  This is not how you build a great nation.  A big nation with lots of cheap man-power, yes.  But not a great nation. 

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#4) On November 20, 2009 at 8:41 AM, russiangambit (29.42) wrote:

Last year China slowed down first, nefore the US. Right after the Olympic their numbers started coming back very low. It seemed exports stopped, commodity consumption stopped. The market started going down right away.

I would expect it would be much oif the same. China consumption supports the commodity prices. This market cannot go up with commodities fall, it is driven mostly by commodities at this point.

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#5) On November 20, 2009 at 11:25 AM, AndreylikesMTL (97.66) wrote:

China will not collapse by itself for a long time But

If US and Europe join forces, and sabotage revolution, like in 1917. Than China will not be a “problem” for decades. Report this comment
#6) On November 20, 2009 at 12:22 PM, starbucks4ever (98.50) wrote:

dibble905,

I did not mean a market correction. I meant a total collapse of the country as a political entity. 

Tasty,

Your point is well taken.

prose,

You are right. However, China's problems are self-inflicted. They could have a normal economy, but its leaders don't want to.

russian,

Yes, it will be one factor, and an important one at that.

Andrey,

The trouble is, if China collapses, Russia will follow in short order.

No commodity demand from China =>

MTL=0

LUKOY.PK=0

OGZPY.PK=0

Putin=0 

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#7) On November 20, 2009 at 2:07 PM, AndreylikesMTL (97.66) wrote:

I meant a total collapse of the country as a political entity.

We will all be finished, you are no better than Alstry Zloj.

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#8) On November 20, 2009 at 3:09 PM, starbucks4ever (98.50) wrote:

I am just being realistic. I don't like panic-mongering, and I truly believe that most problems can be solved. That includes China, Russia, and basically every other country. But there has to be a political will to solve these problems. When I see that China's leaders are no longer driving China at full speed into a brick wall, I will reconsider, maybe even buy a Chinese stock or two.

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#9) On November 20, 2009 at 3:17 PM, catoismymotor (< 20) wrote:

If it drives down the price of almond fried chicken I'm all for it. That stuff is like crack, people!

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