The Great ‘Fall’ Of China [Part 2]

By | Forbes / Investing | Original Source

They say: “There is nothing to worry about. Only a small percentage of Chinese people have brokerage accounts.” Yes, but most Chinese are poor farmers. That makes the small, wealthy class that much more important.

Those Chinese who own stocks may have 99% of all the wealth in that poor country. About 80 million individual investors have stock accounts. They have probably lost everything. The number of Chinese investors is greater than the number of members in the Communist party.

Now the communist government has to repair the damage. How? With more stimulus and coercion. The government is officially making almost $500 billion available to support the stock market. Financial firms are prohibited from selling shares, short sellers will be arrested, and the money from the government to the brokerage firms can only be used for buying, not selling, stocks.

However, this time investors will be smarter and stay out. The government will be the primary investor. Would you want to be exposed to the whims of a communist government? Why would a smart investor buy when he does not know if he will be allowed to sell?

The China bulls say that the Communist Party will prohibit the markets from falling further. Good luck with that!

The government might be able to support the stock market for a while, but how can it prevent the implosion of the record debt pyramid?

China has been the locomotive for global economic growth for the past 15 years. Probably 60%-80% of demand for many raw materials, commodities, oil, iron, and coal went to China. Now that China is in a private sector recession, the demand will disappear around the globe. Forget the advertised 7% GDP growth. That is a fairy tale if you think it means “economic growth.”

China has been in a private sector recession for all of this year and longer. Although it got little attention, the China credit crunch got serious in June 2014 when short-term interest rates tripled overnight to 25%. That was when the government’s efforts to hide the facts slipped out.