Saturday, November 20, 2010

China Crash Predictions, Part 5 - Rickards

March 2010
[Jim] Rickards explains his theory by comparing China’s central bank and economic management to that of a typical hedge fund. China is hedging some of its economic risk by “buying dollars and short-selling Yuan.” in hopes to offset risk in their economy. By doing this however, it is stopping the Yuan from gaining strength. The weakening Yuan could be the tipping point causing an inflationary risk to the market.
Ah, now we are getting into triggers. And what is China fighting right now?

Just today:
China's suspends diesel exports as country fights inflation
The decision by state-owned Sinopec will help meet domestic shortages blamed on a government conservation campaign and possible hoarding by state oil companies.
Politically sensitive food costs surged more than 10 percent as inflation jumped to 4.4 percent in October, well above the government's 3 percent target.
Diesel supplies ran low after thousands of factories bought diesel generators to cope with power cuts imposed by authorities to meet energy-saving goals. That boosted already strong fuel demand.
Speaking of misallocation of capital.

March 19 Analyst Wire Interview
Now, what they're doing is they're leveraging up in that sector. And there's a very large shadow banking system in China that's not well known. People look at the banks and they say well they're fairly healthy, and they are. But banks always look healthy until the values collapse and that's when they start to crash themselves.

But there are a lot of unregulated lenders. There's a lot of in affect defector banks that are lending and fueling and this. And then the local governments, the provincial governments are adding to the problem very much like Fannie and Freddie, which is that their source of revenue is from these property flips.
They need to get these local governments out of the business of, you know, stoking the flames of property speculation, so to speak, and raising interest rates would be another good way to do it.
Very similar to the United States, I mean what's developing in China in the property sector looks like the U.S. from 2002 to 2006. Again, there's a real economy there but there's this bubble growing on the side. We know when bubbles break the contagion spreads to other sectors and that's the concern.

[Catch the rest of the China Crash Predictions Series]

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