China Inches Closer to the Edge of Chaos

December 12, 2011


While the majority remain blind to the domestic and geopolitical risks posed by China, the consensus now sees a rough ride ahead for the Red State economically. Over 60% of respondents in a recent poll see a Chinese banking crises.

Being short, it’s uncomfortable being on the side of the consensus, but it is a necessary element of a long term position. It’s not until everyone is bearish that you get the panic and capitulation and hence, want to flip to a bullish position. China is no where near this stage. There are plenty of stories of people who were short housing, only to give up their positions right before the collapse. I will not be one of those.

The negative sentiment does suggest we are in the middle innings. Fortunately, the biggest moves happen at the end of a long trend.

The next step is a major bankruptcy, or a fraud, will trigger a crises of confidence about all Chinese firms. Chinese banks will seek to raise capital from foreigners one more time. Outflows will follow.

Foreign exchanges reserves fell in September, the first time in four years. Tao Ma is an Economics Ph.D. at the People’s University of China made a point oft mentioned here about hot money and the Yuan.

“He explained that in the process of waiting for the yuan exchange rate to increase, this money was poured into the real estate market, stock market, underground private banks, and other speculative investments. However, as China’s economy cooled down, the money began to flow in the opposite direction.” – The Epoch Times

The next group of leadership in China is much more nationalistic in nature than the current. They may look to coopt industries in favor of domestic companies, exacerbating the outflow of foreign capital.

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