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A Chinese Recession Could Drag
the Entire World Down




China's booming economy is getting lukewarm. For more than a decade, the hybrid economy-driven communist country has been registering staggering high levels of GDP.

The "ingredients" of such an economic nightmare scenario could be: banking crises, industrial production decrease, decrease of exports, wage increase-induced lower productivity rates etc.

The signs are already here... There's a high chance for a Chinese recession.

Should we start preparing for the worse?



What We Couldn't See From Outside of China


News, events don't propagate easily to the rest of the World. We're more up-to-date with the events in the USA, Europe and the Middle East than China. The developments are covered in myst, but something is about to happen. The signs are not at all encouraging.

A credit crunch may be in the developing phase in China.
A multitude of financial institutions have built up a pyramid of credits and loans and the first signs of the popping bubbles and insolvencies are showing.

Banks in China are having severe difficulties.

According to the Weibo press agency, the ICBC clients were unable to withdraw their money from ATMs last month.
ICBC is China's largest bank with approximately 16,000 offices country-wide. Anything affecting this bank will rapidly propagate to the entire Chinese economy.

Even the Bank of China and the Bank of Nanjing experienced difficulties - particularly in their money transfer system.

The banking system's turmoil was reflected in the markets - shares dropped.



What Reuters Says...


China is showing the same signs the US and Europe did before the 2008 crisis: the banking sector has accumulated a huge amount of debt, real estate bubble has formed and the economy is slowing down.

Nevertheless, China has a severe problem in its financial system.



The Shadow Banks and Their Influence
on the Chinese Financial System


These are non-bank financial institutions, which generally act as intermediaries providing services that are similar to those offered by the traditional commercial banks.

Examples of shadow banks: hedge funds, structured investment vehicles, money market mutual funds and others.

These institutions conduct various speculative activities, which in the first phase can be profitable, but on the long-term inevitably form a bubble.

Shadow banks make credits rise rapidly in China, threatening the entire economy's stability.



The Chinese GDP Growth is Slowing Down


According to the National Bureau of Statistics of China, the economy grew by 7.8 % in 2012 (real growth rate).
Although the figure is immense for an economy, in previous years the figures were much higher: 9.3 % (2011), 10.4 % (2010), 9.2 % (2009), 9.6 % (2008) and so on.

The modest growth figure of 2012 was the smallest one registered since the year 2000.

China being the World's biggest exporter, it is already feeling the effect of the crisis that has affected the European and US economies. Less purchases from China's main clients means lower export rate. This can eventually influence the industrial production as well.

China is trying to cope with the negative effects of the global economic crisis by minimizing its dependency on exports. Therefore, the government is taking measures to stimulate industrial consumption.

Overall, we could say that if the Chinese economy enters into a recession, then this could have devastating effects on the rest of the World. Obviously, it also depends on the main factors of the recession. Will it be mainly due to shrinking exports, reduced industrial production? Will China experience a 2008-type financial crisis?

It remains to be seen, but hopefully the problem will be dealt with and the cataclysm avoided.





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