Re: China Business Cycle Crash and Interest Rate Spike

This is what me and my colleague, Russell Lamberti, wrote to clients on March 12, 2013 regarding the Chinese business cycle:

The economy now sits with enormous malinvestments in basic infrastructure and real estate. If the monetary environment remains tight, the term structure of interest rates will correct to pre-monetary intervention levels – meaning a big shift higher of particularly short-term rates – and these malinvestments will liquidate, causing major business cycle risks in China that have the potential to become an outright crash.

Two months later, the 7-day interbank repo rate has spiked from below 3% in mid-May to 12% today. That’s the spike we were waiting for and this is about to set in motion a cascade of very negative economic consequences for China and potentially even the global economy.

China business cycle update on its way to ETM Analytics clients inboxes later today.

PBS 60 Minutes on China’s Housing Bubble and Ghost Cities

In a fascinating 11 minute segment, 60 Minutes looks into the housing bubble and the ghost cities in China. This is what happens when a central bank distorts interest rates by pumping freshly printed money into an economy, coupled with huge government spending projects to build infrastructure. Maybe they’ve built these cities to house South Africans being chased out of the country by the socialist ANC. Or Americans, Frenchies and Londoners leaving their countries to escape high taxes. Either way, if the Chinese can’t find real demand to validate these investments (i.e. to fill the shopping malls and apartments with people), the economy will experience a massive economic crash. But we know that won’t happen quickly, so the crash is a certainty.