The China Syndrome

Posted by Chart of the Day - comment by MISH'S Global Economic Trend Analysis

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For some perspective on one of the more important global stock markets, today’s chart focuses on Chinese stocks and presents the current trend of the iShares FTSE/Xinhua China 25 Index (FXI). As today’s chart illustrates, Chinese stocks have endured what amounts to an extremely wild ride since 2005. Considering China’s increasingly significant contribution to the global economy, this recent stock market action is most definitely a red flag.
The FXI trended upward at an ever accelerating rate (i.e. parabolic) from 2005 to Q4 2007. As the credit bubble began to unravel, so too did Chinese stocks with the FXI trending downward at an ever accelerating rate from Q4 2007 to Q4 2008. Beginning in Q4 2008, the FXI surged — gaining over 155% trough to peak. Since that post-financial crisis peak back in Q4 2010, Chinese stocks initially treaded water but more recently have entered in to a steep downward trend channel. – Chart of the Day

A Recession in China would affect the resource producing regions of the world.

Marc Faber: China may be on the verge of economic collapse, stemming from the dreaded one-two punch of rapidly increased capital goods overcapacity to match significant reductions of global demand for its products.

“I think if China had much slower growth or even a recession, which very few people talk about, but it is conceivable if you look at the U.S. 1800 to 2000, we had many recessions and we kept from growing. But basically, if that happens, then the demand for raw materials would go down. So it would affect all the resource producing regions of the world, including Latin America, Africa, the Middle East, central Asia, Russia, Australasia, and it would affect their currencies. And then these countries would have less money to buy goods that come from China, and we could have a downward spiral in the world which would be very vicious.”

The often repeated story regarding China is that the country will grow without end,  it will overtake the US, and rule the world. The recent precipitous decline in the price of cooper tells Faber that China’s rapid GDP growth may have been somewhat of a mirage for a spell.  What was once thought of as a clever means for China to dump U.S. dollars in favor of ramped-up infrastructure spending in the People’s Republic, with numerous reports streaming into the West of newly-built cities erected in anticipation of millions of soon-to-come inhabitants, may, instead, result in another example of a Mao-like central planning scheme gone bust. Marc Faber’s Blog


China no Miracle

I propose the China story is really about rampant credit expansion, malinvestments, unproductive assets, no free capital markets, centralized planning that people mistake for capitalism, no legal system of merit, no freedom of speech, no respect for either property rights or human rights, and that peak-oil will in and of itself kill the story.

In short, all the people who think China is some sort of miracle savior for the world economy are going to find out otherwise.
The Yuan will not become the new world reserve currency.

China does not have deep enough capital markets or deep enough bond markets. China does not respect human or property rights, and contrary to popular belief there are so many problems with being the world’s reserve currency that Chinese leadership does not even want it. Mike “Mish” Shedlock

About MISH’S Global Economic Trend Analysis

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

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When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at


Mike “Mish” Shedlock
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