China Stock Market Crash Goes Global

Stock market crash (Richard Drew / Associated Press)
Richard Drew / Associated Press

With China in the midst of a foreign exchange and currency crisis, investors around the world are hitting the “sell” button in a scramble for cash liquidity.

Chinese regulatory authorities initiated the “circuit-breaker” rule just 15 minutes into the day to suspend the nation’s stock trading after a 7 to 8.25 percent crash.

Despite the extension of selling restrictions on large shareholders that own 5 percent of more of a listed company’s stock in China, the 46-nation MSC world stock Index fell by 2.5 percent and oil plunged by 5 percent to $33 a barrel as the crisis spread.

U.S. stocks that rely on Chinese consumers were especially hammered. Apple Inc., which relies on the “China Region” for 24 percent of its sales, saw its shares plunge by about $3.50 to $97, its lowest price since July 2014. Tesla Motors, which quadrupled its charging stations in China in anticipation of a sales surge, saw its shares fall by -$7.

The international panic was sparked by the People’s Bank of China’s announcement that the official foreign exchange reserves posted a record $107.9 billion decline in December. The drop was the steepest one-month decline in history and capped a $1 trillion decline since mid-2014, according to Stratfor Global Intelligence

China has complained that America received a global “exorbitant privilege” as the world’s only reserve currency, because the U.S. was able to purchase imports in its own currency. That allowed Americans to buy foreign products more cheaply and the U.S. government to run huge trade deficits without a balance of payments crisis.

For the last two years, China has been promoting the internationalization of its yuan currency as an alternative reserve currency to the U.S. dollar. But that strategy required opening up greater foreign exchange movement within the formerly isolated “Red Dragon.”

It was assumed that with $4.3 trillion in foreign exchange reserves, China’s government-led effort to pump back up its stock market, which suffered a 41 percent crash last summer, would succeed. China stocks did rise by about 20 percent and the yuan exchange rate to the dollar remained stable at about 6.2 yuan to the dollar.

But as Breitbart News warned last August, accelerating capital flight would eventually generate a China currency crisis. We reminded readers of the old Wall Street saying, “The easiest way to make a small fortune is to have started with a large one.”

Most of the so-called Chinese “economic miracle” was a result of 67 percent devaluation by China in the mid-1990s that saw the exchange rate of the yuan to the dollar fall from 2.7 to 8.3. The devaluation drastically reduced the standard of living for domestic Chinese consumers. But as an impoverished communist nation, the Chinese authorities had the iron-fisted power to mandate the devaluation.

The economy boomed for two decades and China accumulated about $4.3 trillion in foreign exchange by mid-2014. But with the yuan strengthening after 2006 by about 25 percent to 6.2 to the dollar, China lost its cheap labor competitive advantage to other impoverished nations.

By our August analysis, every 10 percent movement in the yuan’s exchange rate would add or subtract about 17 percent to China’s “processed” assembly export volumes and create or destroy about 30 million Chinese jobs. To sustain its current export-led economy’s employment levels, China would need the yuan to depreciate by about 22 percent.

The communists in the old days could administratively solve their competiveness problem by mandating a currency devaluation. But China’s recovery since the 2008 Great Recession has been powered by a massive monetary expansion. Although China appeared to be the winner over the next six years, most of its success was powered by a 250 percent increase in state-owned bank lending to state-owned enterprises and local government. At least a third of all large Chinese borrowers and about half of the Chinese provinces are now seriously insolvent.

In the last six trading days, the yuan has fallen by 6 percent to 6.6 to the dollar. Although China theoretically should gain about 17 million jobs, the internationalization of the yuan means that China’s foreign exchange reserves are evaporating and state-owned enterprise borrower insolvencies could result in bankruptcies of state-owned banks.


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