Friday, September 30, 2011

When China Sneezes

     The old cliche 'when America sneezes the world catches cold' still holds true. Look at the damage we did to the world with our housing and credit bubble, and subsequent crash. In the past decade or so the world has morphed into a single organism, a collection of interdependent countries thanks to cross-border trade. With countries such as the USA outsourcing it workforce to Asia, and financial markets becoming increasingly fungible across geographies, the knock-on effect of an event in one country can be devastating. The earthquake and tsunami in Japan earlier this year, for example, is still reverberating through supply chains and damaging revenues globally.
     So, when I read today in the FT that property development in China is looking shaky I got a chill. There are half-built luxury residential properties dotted throughout China's largest cities, and demand for these apartments has all but dried up. If developers are forced to reduce the prices on them in order to sell, it could have an immediate impact on sky-high real estate prices across China. The knock-on effect of this could be significant. Demand for steel, cement, copper and other building materials could hammer prices globally. For a start, China is the world's largest consumer of steel and, according to the FT, real estate construction accounts for 40% of China's steel use. And because China hoards building supplies its demand for fresh stock could languish for years.
     If a housing collapse could flatten the US economy, it could surely do the same for China. If China slides into recession - and I'm being kind, analysts think that it will have a hard landing - we could see the biggest knock-on effect yet. Global recovery would stop dead, and the worst-off economies (Greece, Italy, Spain, etc.) would teeter off the cliff. The US would sink like a stone - China is the largest investor in US treasury bonds, and further investment would likely be curtailed if it fell into recession.
     I am not an analyst, but sometimes the writing is on the wall and this is written in neon. I think my 401K is about to be converted to cash.

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