Another China Stock Market Crash May Be Coming
Lance Jepsen | Jul 01, 2016 01:11PM ET
China's manufacturing sector continues to contract. The Caixin China General Manufacturing PMI for June came in at 48.6. For the last three months in a row, China's PMI has come in below 50.
Chinese corporate bond market defaults are on the rise. So far in 2016, 34 defaults are on the record books totaling $3 billion. That is double the number of defaults for all of the last year.
Sean Miner of PIIE writes,
"Around half of the defaults have come from state-owned enterprises (SOEs), although private firms have seen their fair share. The rise in bond defaults is even more remarkable because local governments have tended to step in to cover any potential missed payments, making defaults very uncommon."
China has spent nearly 20 percent of its foreign-exchange reserves to prop up its stock market, yuan, and to stem capital outflows.
The People's Bank of China burnt through 20 percent of its war chest since 2014 to support the yuan and stem capital outflows. The Chinese stock market is still down -40% over the last year.
China Real Estate Bubble Continues
China's real estate is in a bubble with home prices rising over 50 percent in some locations. A property bubble happened in the U.S. right before a stock market crash and subsequent recession.
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China Crash Will Lead To US Crash
Should U.S. stock traders care about what's going on in China? Yes. The most likely response from the Chinese government in the event of a stock market crash will be to devalue the yuan. yuan devaluation will push the US dollar up and hence the US stock market down. Traders in the U.S. saw this happen in early 2016.
China's biggest trading partners will be impacted the most in the event of a rapid yuan devaluation. China's products will become much cheaper while China's trading partners products will get more expensive.
The economies of China and the US are so intertwined that if China's economy crashes, so will the economy of the United States. That is what George Soros thinks. George Soros is so freaked out about China that he has sold out of his US stocks and has increased his position in gold. According to Soros, there is a major resemblance between China now and the United States in 2007-2008 just before the U.S. economy entered the Great Recession.
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