Chinese Credit Crunch Could End Commodities Run

by: Larry MacDonald April 01, 2008    
Larry MacDonald

Larry MacDonald

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Oh great. It looks like another credit crunch is on the way. It’s been overshadowed by the one in the U.S., but not for much longer it would appear.

For quite some time, the Chinese government has been tightening monetary policy to curb excessive bank lending in order to cool off the sizzling hot Chinese economy. A centerpiece in policymakers' efforts has been a lengthy string of hikes to reserve ratios for Chinese banks -- to 15.5% as of mid-March.

The clampdown finally appears to be biting. The Shanghai stock market has tumbled more than 40% from its peak about three months ago -- as can be seen in this chart from the Calculated Risk blog. The iShares FTSE/Xinhua China 25 Index (FXI) shows a similar drop. In addition, Chinese land and property prices are sliding, notes Avner Mandelman in the Globe and Mail.

It makes one wonder if the commodity boom is in for a substantial correction. There is a theory the boom can survive a U.S. downturn thanks to Chinese demand -- but if China is slowing down too, not much else is left to hold the sector up. Could it pose a risk for Canada’s buoyant performance to date?

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This article has 9 comments:

  •  
    Apr 01 07:47 PM
    There is a theory that slowing US demand that drives Chinese exports that drives Chinese demand is going to have some part in this.

    I wouldn't be surprised to see a top in the TSX at 13800 (or maybe just sideways?) before the index starts to accelerate lower but time will tell. Once the US gets done buying Wii's with the bail out cheques who knows where we'll be.
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  •  
    Apr 01 08:00 PM
    What about Canada? I'll be using my tax rebate to pay my outrageous property taxes which go towards our abysmal public education system by the way. If Obama is elected I'm guessing a lot of working-class Americans will be spending a lot less on stuff from China because they will be busy paying more taxes for welfare, failing schools, and prison costs. Anyone see the papers in the U.K. today? They are suggesting our economy is in another great depression. lol
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  •  
    Apr 01 08:38 PM
    That I can remember Canada has not done well during a US recession. I think it may just be a matter of time. Not to mention the TSE barely went up today with the Dow since the commodities are coming back down. Nor did all of our bank stay away from the pitfalls of subprime loans.
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  •  
    Apr 01 11:13 PM
    Don't speculate on Chinese equity market if you don't have a profound understanding. What happened in Chinese equity market has nothing to do what happens in China right now. It is a natural result from what happened in China three years ago and even twenty years ago.
    Reply | Link to Comment
  •  
    Apr 02 03:35 AM
    I exited EWC to protect some of my capital for this very reason. Maybe nothing will become of it, and Canadians will still enjoy robust employment activity.

    I only ask that Forex traders please help push the USD back up. Do it for the Canadian ex-pats who are looking to retire in Vancouver one day.
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  •  
    Apr 02 11:01 AM
    Darn. Just when people thought it might be a good thing to sell the copper plumbing and replace it with PVC to make the next house payment...now this!
    Reply | Link to Comment
  •  
    Apr 02 11:31 AM
    China has problems. The rice bowl could crack. nickgogerty.typepad.co...
    Reply | Link to Comment
  •  
    Apr 02 01:59 PM
    The Chinese stock markets were being driven up by ponzi scheme like investments in each others' stocks. "Profits" were coming mainly from rising investments in other Chinese companies. At a very low level of investment this would be fine, but the actual numbers are discernible and thus are likely to be ugly. The collapse that is presently underway will not be a result of China's growth stalling as much as it will be the money borrowed from Chinese banks that was deployed into other firms stocks rather than the core business that justified the loan.
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  •  
    Apr 02 05:17 PM
    Larry McDonald:

    You are wrong. The Chinese stock market fall is nothing but a healthy correction. Note the Shanghai index is still higher than where it was this time last year.

    If you are talking about commodity and talk about China, ask Jim Rogers. He is a guru both in commodity and in China. There is no better person to ask about both at the same time. He believes the commodity bull cycle can last another 5 to 10 years. I believe probably longer.

    Read this rebuttal to Mr. Gene Epstein who published a Barron front page article:
    seekingalpha.com/artic...
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