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China’s slowdown in its GDP growth rate will definitely lead to a global
meltdown. [Here’s why supported by a number of charts and some well reasoned rationale.]
By Chris Vermeulen (TheGoldAndOilGuy.com)
The Chinese GDP growth rate: “The New Normal”
The ten-year growth chart below shows a dip in Chinese growth since 2012. Even during the ‘The Great Recession”, China’s growth rate never dropped below 8%, within four connective quarters. However, since 2012, growth has not increased over the 8% mark for two consecutive quarters and is currently at less than 7%. I suspect that the numbers are “bogus”, and that China’s economy is not expecting more than 3%-4%…
In May 2015 the Chinese government announced the growth of 7% as the “New Normal” for China. This underlines acceptance that the Chinese economic growth has peaked.
Chinese actions have not been able to stimulate growth
The Chinese Central Bank has cut interest rates six times in 2015, reduced the reserve requirements for banks, devalued the Yuan and pledged to do more, if necessary, however, growth is still struggling to reach the 7% target.
Their domestic growth is not picking up. The investment led boom has raised the debts to 292% of the GDP. Meanwhile, factories are cutting jobs, manufacturers have reduced their prices, due to competition, etc. Deflationary pressures within the Chinese economy are increasing and it appears it may last for an extended period of time…
How much does China contribute to global GDP growth?
The chart below signifies the effect China has on the global economy. Although, it is the second largest economy in the world, after the US, it is a major contributor and the engine of world GDP growth. These top two nations contribute to more than 82% of the global GDP growth. Any slowdown in China will affect the global GDP growth since no other country is capable of offsetting the “Chinese Effect”.
The reason for the drop in commodity prices – China
The chart below speaks for itself. Many nations like Brazil and Australia are dependent on the commodity exports to China; countries like Canada, are indirectly affected, as they are mainly dependent on crude oil prices. A few producers have announced large production cuts in order to prepare for the low demand from China.
The direct effect of China’s slowdown within the U.S. economy and the S&P companies
The shale oil industry in the U.S. expanded rapidly to fulfill the rising energy demands of the world. As the crude oil prices were high, many investors participated in the junk bond issues of the shale oil companies, although they were not investment grade. The big drop in crude oil prices is financial hurting these companies and, in turn, their ability to pay their bond holders. If prices don’t recover immediately, we are likely to see many energy companies declaring bankruptcies, which are a risk to the banks and junk bond funds which loaned them monies. This fear has led to recent junk bond collapses.
Apple sells more iPhones in China, compared to US sales. Although, iPhone sales have continued to grow, chances are that a sustained slowdown in China will adversely affect Apple. Similarly, several luxury brands, hoping to capitalize on the Chinese growth, will find it difficult to sell their products, within a slowing economy.
China’s stock market performance in the last 20 years
Although, most of the world markets have reached new highs, the Chinese market is now collapsing!
Trading, Investing and Economic Conclusion
In short, no one knows how the global markets will react to the collapsing economy in China. This is a major risk factor as there are no concrete actions that can be implemented to avoid this deteriorating situation.
The Chinese growth is not responding to any growth stimulus at all. Currently, the world is at a critical junction, with all of the major economies; the U.S., Japan, Europe, and China, all facing deflationary pressures. There is nothing left to propel the global economy, with stock markets all over the world at risk of a MAJOR DROP occurring in 2016…
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[The original article was written by Chris Vermeulen (TheGoldAndOilGuy.com) and is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – sign up in top right corner) in an edited ([ ]) and abridged (…) format to provide a fast and easy read.]
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