It is an old market adage, when one country sneezes and another catches a cold. It is a cheap sales line used by financial commentators to describe a falling market due to the effects of its neighbor. For example, the British market sneezes and Europe catches a cold, meaning if the British market takes an unexpected dive for a period of time, European markets follow in sympathy. However, if China were to sneeze, it is likely that the rest of the world would not just catch a cold, but may well be bedridden with pneumonia.
We have found throughout 2010 that our western markets, or free markets, are in fact nothing of the sort. They are in many cases manipulated, opaque, corrupt and even rigged. To many people this was a surprise. The great capitalist world is not so free and unencumbered by government intervention, like America’s plunge protection team. This is a team who on a coordinated basis pump money into U.S. markets on behalf of the government in order to “stabilize “ U.S. financial markets, or in many cases save them from bankruptcy. This practice was not public knowledge, as it in fact went against the principles of a free market. Yet, the U.S. and European markets have all faltered. In the United States, housing prices have gone into freefall, banks are failing on a weekly basis; states are teetering on the brink, with some, like California, close to bankruptcy. In Europe, they needed a 1 trillion euro bailout to keep some of the member states going.
So how is it that China, with its command economy, where people fully know that the Chinese government support and manipulate their markets, particularly the artificial low price of the yuan, has not yet faltered? China apparently has entire ghost cities, new ones which have been built but no one lives there, because the Chinese real estate market is in the grip of a bubble, which is about to burst. And if it does go bust, in a similar way to the U.S. and European markets, the rest of us are going to be in a world of hurt.
There is no question that the recent world commodities boom has been driven by China’s thirst, its demand for raw materials. It is in part predicated on the belief that the Chinese economy is in good shape, and that there are no asset bubbles in China, no risk of deflation. Deflation is gripping asset prices in other countries, particularly in property, but many believe that China can pull the rest of the world along, keeping the air in the balloon. If China deflates, and demand for commodities takes a dip, which I firmly believe will be the case in 2011, then the recent financial crisis will look insignificant in comparison to the one unleashed by a faltering China.
For a start, commodity-based economies which have done well so far, like Australia and Canada are going to get pounded. Australia, with its high level of household debt, will implode if its real estate market deflates on the back of Chinese money pulling out and commodity prices falling. Europe will certainly be affected, as the Chinese will not buy European debt in order to bail out sovereign states, as they recently stated they would. The United States will no longer be able to inflate its way out of debt by flooding the market with fresh dollars, as the Chinese will no longer buy them.
We are in a deflationary cycle, where sovereign debt will have to be written off at some point, otherwise nations will default. It is hard to image that China will remain the one anomaly, the one hope as the driver of the global financial markets. A hard landing for the Chinese economy is going to mean a crash landing for the global economy.
There is hope however. There will no longer be any excuses not to affect real, meaningful change to the operations and institutions which make up the global economy. Trillion-euro bailouts, QE2 and other taxpayer funded bailouts to the banks will cease. Markets will have to integrate, to standardize, to globalize, to meet the dynamic requirements of the 21st century.
We can no longer pretend that international markets are separate. The imbalance between the “saver nations” and the “borrower nations” will have to be addressed. At the moment, many are lulling themselves into a false sense of economic security with the hope that China and its economy will save the day. There is only one money pot in the world, and all nations must learn to use it more efficiently in the markets of tomorrow.
Predictions for 2011? Hang on tight; the real excitement is yet to come. Many new markets and opportunities await, but make sure you keep a handkerchief in your pocket, because China will sneeze, and you might just catch a cold.
Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.