The Chinese Ripple Effect

Jul 10, 2015

It used to be said that “when the United States sneezes, the rest of the world catches a cold.” It was a reflection of America’s economic power and the impact it had on all other economies. 

The same could be said for China today, and its sniffles are starting to look more like pneumonia. The ripple effect can be felt from Washington to Wall Street to Williston and could even influence the outcome of the coming climate change conference in Paris.

The situation: China is experiencing some major economic growing pains. Its latest crisis has to do with its plunging stock market. In a little over a month, the Shanghai Composite Index has dropped 32% - erasing about $3.3 trillion in stock valuations. That’s equal to about 14 times the entire GDP of Greece. 

Beijing has taken massive steps to turn the tide, but it is unclear yet whether or not it will be enough. What is clear is that China’s “slumping” economy has already impacted the global commodities market big-time, and the ripple effect has not yet been fully felt across all world financial markets.

News Flash has reported frequently on the danger of bursting bubbles and how they could trigger a perfect storm (See: “Bubblemania is Contagious"). To put it in perspective: Greece is troublesome, but a Chinese economic meltdown could be catastrophic.

Consider this:

Economic ripples: China has invested trillions in the U.S. in both our public and private markets and/or their central bank holdings of our dollar currency. If China calls in some of these investments to bolster their stock market, currency or economy, watch out.  

Commodity ripples: As the world’s largest buyer of copper, oil and most other commodities, China has created a demand that, until recent years, has kept commodity prices up. If their economic “slump” causes an ongoing reduction in oil demand – and oil prices – the outlook for shale oil producers in North Dakota hoping for higher oil prices, for instance, will not be good. Again, it’s the ripple effect. 

Climate change ripples: China has stepped up to the plate on greenhouse gas (GHG) reductions with a full court press to reduce greenhouse gas emissions and a recent declaration to work with the U.S. on climate change. If its economy starts to tank – and with it the global economy – the focus on GHG reductions will play second fiddle to other priorities and valuable time will be lost.

Destabilizing ripples: China has made enormous strides to open up its markets and society, introduce transparency into its system and to seek to grow in relatively peaceful ways. If its internal structure is threatened by a significant economic downturn, look for even tighter controls from Beijing across a large spectrum of fronts; some of which may not be to the liking of the rest of the world.

Closing thought: 

We live in a global economy where the impact of an event anywhere – be it Greece or China – ripples across the world in only a short time. Living, as we do, under the umbrella of the worldwide credit bubble that now exists, it won’t take much to topple the economic house of cards that now underpins the entire global economy – or worse, trigger the perfect storm.

Our advice: Keep a close eye on China; consider it within the context of other priorities like economic, energy and climate change policies; and revisit your own personal risk exposure in light of these recent events.

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