Ten days ago, I wrote a post discussing the impact of a possible recession in China. Since then, we have had two events in China that are of great importance to the world economy. First, interest rates in China were adjusted to promote greater growth. Second, China has now changed the rules for bank deposits and loans, again in a way to promote growth. Now comes the question: are these developments good news or bad?
The markets were clearly happy when the Chinese interest rates were changed. Stock futures jumped big time on the news. China was going to boost its economy and help the rest of the world too, or so the market seemed to think. But let's think about this. We need to decide if China is still moving ahead as an economic juggernaut so that the recent moves are just minor course corrections or, alternatively, China is moving into recession and these moves are initial responses from Chinese authorities to try to slow and reverse the decline that is underway. The big problem, of course, is that we are dealing with China, so there is no way to know the answer to the question for sure. Apparently, there is no word in Chinese for transparency.
My opinion is that it is more likely than not that things are not doing that well in China. Just look at the price of copper. This metal is essential to China's standard growth model. It is used in all sorts of construction and industrial projects. And its price has declined by nearly 20% in the last three months. This means that there has been a major decline in demand, and most of that demand now comes from China. There are other indicators that things are not going well in China.
I do not own any Chinese companies, but I strongly recommend that you use any bounce up resulting from the recent moves of the Chinese government to unload them or at least to make your positions smaller. To me, it is the only prudent thing to do.
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