This page has been archived and commenting is disabled.
Could China Be Forced To Bring A New Global Recession by 2015?
By Dian L. Chu, EconForecast
Bloomberg on Sunday, Jan. 30 cited a 28-page report--The Financial Crisis of 2015: An Avoidable History--by Barrie Wilkinson, a London-based partner at consulting firm Oliver Wyman.
The report describes a scenario--spanned 2013 to 2015--when Western QE-induced inflation brings down China, creating a debt crisis in the commodity sector--inclusive of resource-dependent countries as well as commodity producers--which eventually plunge the world into another recession, and a new world order by 2015.
"...the dramatic rises in commodities prices resulting from loose Western monetary policies eventually caused rampant inflation in China. China was forced to raise interest rates and appreciate its currency to bring inflation under control."
Well, I think we are pretty much there already.
"Once the Chinese economy began to slow, investors quickly realized that the demand for commodities was unsustainable. Combined with the massive oversupply that had built up during the boom, this led to a collapse of commodities prices."
Although I see this as low probability, but can't totally dismiss it. That is why global markets always sold off whenever there was news about China.
"Having borrowed to finance expensive development projects, the commodities-rich countries in Latin America and Africa and some of the world’s leading mining companies were suddenly the focus of a new debt crisis.".
The report describes that the new commodity debt crisis--in a sub-prime-like fashion--would hit banks and insurers via direct or indirect exposure, causing many to finally default. Without the emerging growth engine, the world would once again fall into recession.
New World Order By 2015?
This new commodity debt crisis would then bring the judgment day to sovereigns in the US, UK and Europe with "debt mountains emerge as the ultimate source of global systemic risk." And 2013 to 2015 would become "the single biggest rebalancing of economic and political power since World War II." (See Chart Below)
My Take
While I do agree that the sovereign debt is a great risk to another recession, and the scenario outlined by the report is quite plausible--when taking place in stages--most likely in the next decade or so, instead of by 2015.
Furthermore, the scenario is based on the premise that China's inflation problem ultimately causes a new global recession by 2015; whereas the current inflation situation in China although quite alarming, is not yet out of control.
From various indications so far, the Chinese central government seems to have committed to employ all necessary resources to rein in price bubbles, and I believe Beijing will most likely have it under control in the next two years. The growth rate may slow down to 8% range growth instead of the break-neck double-digit pace. So, commodities might cool as China tightens, but still well supported as China puts a floor on commodities.
Nevertheless, since “observable fragilities in the global economy” do exist aplenty, a renewed crisis of any kind is all but too easy to erupt. So, I guess the world could eventually get to the "Judgement Day"--regardless how or when--if it holds the current course.
The report calls this scenario “an avoidable history,” and urges regulators to address the financial market distortions, and that bankers should monitor risk levels and not take on excessive risks in pursuit of high returns of the days past.
Bloomberg dubbed Wilkinson as "The Loneliest Man in Davos"...So, the jury is still out on that "avoidable history."
(h/t Jeff Reagan)
Dian L. Chu, Jan. 31, 2011
»
- advertisements -
The wipeout will come in the form of high food prices. As more and more people in the world use more of their income to purchase food there will be less to spend on Chinese manufactured goods (phones, toys, gizmos, etc). China will sell less but pay more for food. This will drive down the prices of industrial raw materials. The results will not be pretty.
+1
In the summer of 2007, some of "the best" in the business decided to cash out at the peak of the market - one that comes to mind is Blackstone. I wonder if we're seeing a repeat of the exact same thing with the rumors of Glencore scheduling an IPO for Q2 (http://www.ft.com/cms/s/0/d9b478f4-298f-11e0-bb9b-00144feab49a.html#axzz1CeVvm8wj)
I've spent quite a bit of time in China over the past 4 years... don't know exactly how to put this in the context of this article, but there's a momentum there. The Chinese have tasted a bit of "the American Dream" and they not only like it, they love it. Rent is cheap, electricity expensive, and of course rising food costs, but they will manage and keep growing, wages are rising, domestic demand will keep things from spiralling out of control too quickly. The Chinese government have projects in the pipeline. All of China's major cities will have electric bus service in 5 years time. They get things done. I just don't see a China collapse nearly as likely as a US collapse.
Go to Shanghai, and perhaps Chongqing, see for yourself. The energy there is intoxicating.
www.chinapositive.blogspot.com
Yes there is a lot of social energy in china. It is hard to quantify but they now have their version of manifest destiny. I hope they are as non interventionist and peaceful as they claim to be. They claim to aspire to a different example of a superower.
oups!!
The Middle Empire...heady combination of post communist theocracy and super entrepreneurial capitalism..wrapped up in a spring roll of totalitarian, opaque brand of free market economy...It's a heady mystification that has been super efficient in playing catch-up ball with the West. Thanks to its peculiar dynamics of Deng Tsiao Ping ponging that made it win-win for both China and the 1% western 'happy few' in the global factory outsourcing game...But now! How do you assume world leadership when you are opaque like a dancing girl of the seven veils in the harem of Cathay? Can you do a 'coming out' in front of the world stage...Play at being Herbert von Karajan at Salzburg music festival...Maestro olé! They shout in Davos...Hope they are not 'pissing into the wind'!
And the new Emperor is shown to have no clothes...Just like Mustapha Mond today! In the existing World Order of USA USA!
The Middle Empire...heady combination of post communist theocracy and super entrepreneurial capitalism..wrapped up in a spring roll of totalitarian, opaque brand of free market economy...It's a heady mystification that has been super efficient in playing catch-up ball with the West. Thanks to its peculiar dynamics of Deng Tsiao Ping ponging that made it win-win for both China and the 1% western 'happy few' in the global factory outsourcing game...But now! How do you assume world leadership when you are opaque like a dancing girl of the seven veils in the harem of Cathay? Can you do a 'coming out' in front of the world stage...Play at being Herbert von Karajan at Salzburg music festival...Maestro olé! They shout in Davos...Hope they are not 'pissing into the wind'!
And the new Emperor is shown to have no clothes...Just like Mustapha Mond today! In the existing World Order of USA USA!
So, the Final Showdown (the one to end all other Showdowns) will be between the Asian Tigers (corrupted Triads and the greatwalled Chinese Politburo) on one side and the Western Financial Elite (senile inbred sociopathic WASPs and their Jewish handlers). Oh, my!
It might.come sooner! Beware the deflation monster.
"China was forced to raise interest rates and appreciate its currency to bring inflation under control."
Well, I think we are pretty much there already.
Has China's currency appreciated yet?
Sorry to make clear...
From the article:
"China was forced to raise interest rates and appreciate its currency to bring inflation under control."
Well, I think we are pretty much there already.
My question: Has China's currency appreciated yet?
A while ago, I also made a conclusion something like it.
Now Chinese products are 80% raw material cost and 20% labor cost.
US products are 20% raw material cost and 80% labor cost.
Now if in the West the raw matrial cost would go to 30 or 40% and the labor cost down to 50%, China wouldn't be competitive anymore.
Add to that rising oil prices and the logistic cost would became such a hughe factor (now at 150% product cost) that it would again be more cheap to make it here.
And if the european and US quality is better, China loses.
I think your numbers are not correct. From my experience in auto and semiconductor industries i can tell that labor cost is about 7% of final product. If everybody worked for free in western countries their products would be cheaper by 7%. Now we have to take a better look at costs and where they are generated. Maybe we start first with management and consulting fees, then go to sales cost, interest costs, rents, land and so on.
+1.
Management costs are by far the lowest hanging fruit out there.
Sudden Debt, just wanted to point out a minor tweak to your formula. The 80% labor cost you mentioned should be 20% labor, 20 old labor (pensions) 40% taxes. In essence you are spot on, my percentages are prolly way off, but done to illustrate a point.
I think companies and government will soon go after pensions either by not paying out or seizing them for the good of the company. Look what happened with those folks that worked for Nortel.
Good point on the rising oil cost btw.