Economic crash in China – or again – in the US?

Looking at recent predictions about where the Chinese and US economies are heading really echoes the cold war. But the arguments are valid and if either, or both of them, crash it would, as we all know, badly destabilize the entire global economy.

China, US, crash, derivatives, lending, sub-prime, invesors, property price bubble,
Are the presidents of China and America presiding over economies that will crash?

China today – the US in 2007?

More and more investors and analysts recently seem to be focusing on potential problems facing the Chinese economy, and they’re worried, to put it mildly.The reason for their concern sounds like a description of the US in 2007, a destabilizing property price bubble and rising bad loans at its banks. All due to China’s recent recession-busting credit boom and even cautious IMF is warning of the consequences of the Chinese economy over heating.

Stock markets worried

The stock markets actually seem to believe the Chinese economy is in trouble. Experts are worried that Chinese growth during the last two years based on enormous government stimulus and unconstrained lending from banks offer only a shaky foundation for further growth. The Shanghai Composite, have hence steadily declined since late 2009.

Boom and bust?

The Chinese economy used to rely on exports to the US, but that changed with the recent recession. Over-investments and over-building has hence driven it for the last few years.

As a result inflation increased and the Chinese government had to curb lending as well as raising interest rates. The slowing down of such rampant lending could actually crash the economy, or at least slow it down.

The good news however is that there are differences between the current troubles in China and the US bank and sub-prime mess. One is that Chinese home owners are not as heavily mortgaged as the Americans were. And another that the Chinese government sits on a 3,000 billion dollar surplus that can be used to prop up sick banks.

Chinese economist predict the US economy will crash

On the other hand, Chinese economists are predicting the US economy will, again, crash. Maybe as early as this year due to the explosive increase of the use of financial derivatives that took place between 2005 and 2007.

According to their calculations, the derivatives that are coming due this and next year are worth ten times as much as the ones that caused the latest downturn and will deal a catastrophic blow to not only the US but the global economy.

Another problem experts see is the loss of faith in US treasury bonds.

Dire predictions for the world economy with its fast growing developing countries and stagnating Western nations. So who’s right and who’s wrong? Will the Chinese or US economy crash? What’s your opinion? Are we heading for a deep depression? Maybe the most important question is that if the Chinese economy slows down, or worse crash, how prepared is the rest of the world to cope? Important because even a small decline in China’s growth can, unfortunately, cause massive problems all over the world.

Photo: The White House – Flickr

39 thoughts on “Economic crash in China – or again – in the US?

  1. Catarina, my two cents, we are already over the cliff, are in denial about our position. The one thing that modern society requires to function at any level is oil. China/India working feverishly worldwide to secure supply, the USA, thru either lack of common sense or worse, blithly sails on, yawning. What has everyone puzzled is lack of inflation in USA. Old economic models may be totally dead. The idea of slowly inflating out of debt not working. And as USA influence and stability declines, conflict between India and China, Indian Ocean, rises on the radar. A hollow USA and Europe possibly not going to have much influence over its fate. Can McDonalds save us? Tata owning Jaguar? For real? Excuse my rant, off to walmart.

  2. There's obviously a consensus of opinion that worldwide economic systems are on the way down. However, this does not necessarily mean a crash. Just like individual people, cultures have "personality" traits. Americans have always been resilient, a fundamental survival skill. America is on the way down, but it will bounce back up due to ingenuity and creativity and faith in American institutions. China may be more rigid, but they have a big cushion. They, too, will go down but level out without crashing. Europe may not be so lucky, because Greece may really fall apart, leading to more regional hardship there.

  3. Hi Catarina,
    Interesting topic. I'm not very up to Global Economics as I should, just some first hand input as a US resident born in China. Like you mentioned in the article, Chinese economy is largely depend on its cheap labor and manufacturers along the coast. China is still very lagged behind on it's high-tech industry, and financial market. With currency now holding all the pressure, increasing labor cost , and gloomy U.S. market , its exporting is getting harder. Some exporter already switched their focuses more domestically. But with this inflation, consumers in China are low in purchasing capability. How long will China upgrade its economy to the next level? I don't know, but it could slow its growth largely.
    On the other hand, Chinese government is well-known to influence financial market and economy. They may lead the economy to land smoothly with its highly concertrated power.

  4. You bring up some interesting points Caterina. I believe that China has been on the verge of a major political/economic crisis for some time. The main reason for this is the growing divide between the urban and coastal populations which appear to be well off, and the rural populations that seem to be constantly struggling to survive. The central government is aware of these problems but seems helpless to stop it. A nation cannot continue to function properely unless this type of situation is at least mitigated.

  5. Fascinating article, though I confess this is a tough subject for me to comment on. I follow news and read a LOT, but I tend to focus on people and humanitarian issues rather than those relating to world economies. Thanks, you've certainly given me something to think about now!

  6. Unfortunately I think the US is headed for some hard times–really hard times. If we're not careful, we're going to end up with a ruling class elite that controls all the money/resources while the public languishes at their mercy.

    Through our own ambivalence we've helped create this problem. It will only be solved by our own sheer will–stand up, demand accountability and take care of ourselves and our families.

    One of the reasons I took up gardening. At least I won't starve!
    My recent post The Sweet Smell of Dirt

  7. Interesting article, Catarina. As gail & Sherryl said, time will tell what happens.

    I hope neither economy will crash.

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  8. Article is right on target, Catarina. In my writing, I've been chronicling the death rattles of the USD specifically, and the history of all fiat currencies in general. These economic crisis are the norm. The central banks are in the wealthy transfer business, and always have been. They get land, resources and developed property. The population gets worthless paper, or worse. In the past, some nations have gotten slavery.

  9. If you read the news today, Greece may the country that torpedoes the world economy. They are close to being bankrupt and it's not clear if their Euro neighbors will bale them out. The news from Greece has already caused a big drop in the U.S. stock market. It's a very shaky world out there, from China to Greece.

  10. Not having lived or done business in China, I don't have firsthand account. I do see that with such a large population and a growing number of Chinese consumers, that China can sustain its economy for a time. China is in control and at some stage will not need to depend so much on the U.S.

    Of the two, it my sense that the U.S. will fall before China. Their ginormous surplus vs. our they negative trillion deficit says it all.

    I think we will all need to speak Mandarin fluently!

  11. Catarina, I have to say that I am not nearly as 'up' on global economics as I should be but I did notice US markets taking dips again recently. It is a frustrating position to be in when we have no control. We definitely live in interesting times. Its' could be quite nerve wracking really, that is why it is so important to have our finances in line with a safety net for tougher times ahead.
    My recent post Starting a Home Based Business &amp The Price of Procrastination

  12. Catarina,
    In some quarters the theory goes that the Chinese consumer (and there are lot of them) will replace the declining demand of Western economies on Chinese output . Further, Chinese consumers are becoming increasingly sophisticated in their tastes and therefore Western brands either imported or made locally are increasingly common. In short increasing Chinese consumerism may be the saviour of both the Chinese and US economies.


    1. Rob, that's the current state of affairs, isn't it. China is the growth engine that keep the world economy going. But can the world economy handle even a small decline in the Chinese economy? Is the world prepared for that? Or?..

      1. Catarina
        The “explosion” in consumerism is predicted rather that current and it may be the advent of this prediction that prevents the economic downturn that is feared for China, (I don’t believe a “small decline” in the Chinese economy will dampen their enthusiasm for Western products)

        You’ve also got to wonder if a little economic cooling is required. I have supply lines in China and have visited a couple of times recently, from my perspective China’s is struggling to meet its current demand requirements. It’s very difficult to attract and retain workers, and at this time of year the power stations are unable to keep up with demand and so regular power-cuts are the norm for most industries.

        Maybe a little cooling may also dampen the current inflationary pressures they are experiencing.


  13. Catarina, I agree with Gail that only time will tell what happens. From what I've read the outlook is bleak and personally I feel helpless. Basically, I feel that we're at the mercy of "the people behind the curtain" as Gail calls them.
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  14. I once said that China knows it won't stay in business long if it puts its customers out of business.

    The discussions about China are similar to the discussions about Japan a few decades ago.

    Their economy emerged, ours declined, and we declaimed the Japanese way. Then, their economy decline and ours emerged and we discussed the resiliency of our economy. And so on. The same is happening with China.

    I just posted a monograph on the topic. China: The Economy and a Word Beginning With the Letter P.


    My recent post China- The Economy and a Word Beginning with the Letter P

    1. Yes, the current predicitions about the Chinese economy has echoes of the past, hasn't it Slim. Make no bones about it though, in the long run China will overtake the US and become the next superpower. 🙂

      1. China, not because China has 1.3 Billion people, will go on doing well for a very long time. Part of the reason is that the Chinese people can handle hardship better than the rest of the world. Also, because China is less sensitive to public opinion. Why? Because Chinese people are Chinese–full stop. China's strength lies in its unity. Another, is that China thinks very long term. (The Great Wall of China. 400 years?)

        We refuse to learn.
        Those who forget history are doomed to repeat it. Santayana
        "Those who never learned history are doomed–period!" Slim Fairview

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  15. Economic crashes are just a matter of time. They can't keep playing this game forever and the way they're printing money in the U.S. they would really need to pull a very special rabbit out of a hat to prevent a depression far worse than The Great Depression. I have been writing about that for a long time and anyone with any common sense at all better have a plan that includes stocking up on food and creating local relationships.

    Oh, and by the way, since the coming crashes are intentional even if they COULD prevent hyperinflation they probably wouldn't. (They meaning the people behind the curtain who control the money supply.) Lots of excellent links to resources in the post I've shared in CommentLuv.

    My recent post Why the Economy is In Decline and What We Can Do to Improve It

  16. We certainly are "living in interesting times," Catarina.

    Although there are clearly issues to be concerned about with the Chinese economy, the government there simply cannot afford for things to slow down. If they cannot keep unemployment relatively low – meaning a continued growth rate of at least 8% – they risk some form of popular revolt.

    They also cannot afford the US economy to get substantially worse as a renewed global downturn would (A) further impact China's own economy and (B) a weaker Dollar would materially affect the massive Chinese holdings in the US, including Treasury Bonds.

    Basically, China finds itself in the position of having to prop up the US economy to keep the global economy stable and prevent a downturn in its own situation. I suspect that surplus is going to be very necessary…

  17. The Chinese mentality is very far from the U.S. and Europe.
    Attempts to transfer highbrow business ended in failure. In the mass Chinese are now not spossobny creatively relate to problems that are easy to perform a European. The most important thing – they can not generate a new one. Official findings of the Chinese Government.

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