Where to Go When the Chinese Bubble Bursts

So, we have gone from dire straits, to ‘reasonable’ and now to ‘ample’ and that’s all in the space of just under a week. That’s a turn-around on the liquidity and cash-strapped situation of the state of the Chinese economy, isn’t it? If only we could all be like that everywhere in the world, every economy would be back on its feet and we would be as right as rain. What magic Chinese rabbit has been pulled out of the hat now? Ling Tao deputy director of the People’s Bank of China has made the announcement that there is no need to worry about the liquidity problems that Chinese banks are currently experiencing as they are nothing more than due to the holiday season and withdrawals of large sums of cash to celebrate the Dragon Boat Festival.  Some analysts believe however that the PBOC should have made a statement earlier to calm the markets down. According to the deputy director this will all fizzle out and fade away. The Shanghai Composite is still down today by 0.18% (down 3.52 to 1, 959.51 at 03:15 ET), which is far better than yesterday's close at 5.8%.

Shanghai Composite: 25/06/2013

Shanghai Composite: 25/06/2013

China’s central bank has shown them and the rest of the world’s economies that they are more than reluctant about stepping in and easing liquidity problems. It looks like there is cause for concern as the bear market sets in and starts growling. That might be very good news for the long-term as banks will have to bring their practices into line and clamp down on credit growth, but in the short-term it means a drop for the market.

The credit-squeeze looks like it is already giving a pummeling to some businesses in China. China’s growth rate is at the lowest it has been for over a decade now and that is worrying news. So if the worst comes to the worst, what are the options? The People’s Bank of China is not like western economies. It has not had the experience that western economies have had with dealing with the crises of the past and certainly not on the scale of the 2008 financial meltdown. There have been concerns for months now and it can’t just be the problem of a holiday resulting in the dropping of confidence in the market and worries that have arisen over the liquid deposits of Chinese banks. It is more likely that it is indeed massive injections of liquidity into the economy to fuel growth by the PBOC that is at fault. Already back in September last year, the PBOC propped up the banking system in China to alleviate cash-flow problems (injecting $58 billion over three days). That was the largest amount that they have ever had to inject. The seven-day repurchase rate (a gauge of liquidity) dropped by 1% immediately (it had been at 4.75% for three months).

So where to go and what to do so you don’t get caught up in the turmoil, dragged down until you end up in the soup kitchens? Here’s where you should be going and what you should be doing.

Chinese Stock

Dump your Chinese stock as fast as you can. Analysts are saying that stock is inflated way over the market price and may end up losing up to 50% in value when things go downhill. The Hong Kong Stock Exchange Hang Seng is down by 0.75% again today (67.35 points to 8, 871.28). Companies have lost between 6% and 8%in value in some cases today.

Shanghai Composite: Major Losses

Shanghai Composite: Major Losses

HSCEI IND

HSCEI IND

Yuan

The People’s Bank of China will probably end up resting the Yuan against the Dollar at a lower rate to stop cash leaving the country. Depreciation of the Yuan will follow. Analysts state that the Yuan as well as other currencies may see their currencies fall in value against the Dollar. That will be good news for the Dollar. But, it would be advisable to get out of the Yuan now. Countries that are commodity-rich will also see likely falls as a knock-on effect (South Africa and Russia, notably) from the falls in commodity prices.

U.S. Treasury Bonds

China holds massive stocks of US Treasury Bonds ($1264.9 billion in April 2013), although it is doubtful if China will try and off-load them at any time in the near future. This would have the effect of bringing funds back into China, but it would also mean that it would bring inflationary pressure on to the Chinese Yuan, which would be a bad move. That would lead to export problems and create a knock-on effect bringing the economy down.

But, there is a big sell-off going on at the moment in the wake of the Federal Reserve’s tapering of Quantitative Easing and $48 billion in Treasury Bonds have been sold already in June. If the Chinese do decide to sell bonds, then this will bring the rate lower for US Treasury Bonds, further adding to the already tense atmosphere and pressure being felt today. But, that might slow as the PBOC attempts to ease the worries and the Federal Reserve shows that it will not withdraw until the economy is stable enough to sustain that.

Equity

Hard to see where to go, but there are relatively safe bets as always in food retailers and utilities companies. People are not going to stop buying into those and they will less than likely see a fall happen in terms of value. It would be a good idea to steer clear of engineering companies and certainly of companies that are involved intensively in global infrastructure programs.

The People’s Bank of China has just announced this very minute that it will add liquidity to the markets in an attempt to halt the fear and lack of confidence in the Chinese banking system. But, will this be enough to bolster the banks that are strapped concerning their liquidity at the present time?

About The Author

tothetick

Professional team of writers/analysts analyzing the financial markets.

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