China Joins The Currency Wars: Watch Free Video
When I visited Shanghai with Robert and Kim to speak at a Rich Dad event in 2012, it was clear that China’s great economic boom was over. Whereas on earlier visits, I had seen thousands of construction cranes stretching across the horizon, in 2012 there were only dozens. In my next two Rich Dad blogs (China's Economy has Stopped Growing & Why China's Great Economic Boom is Ending) I explained why China faced a much tougher economic future.
This week, unable any longer to hide the extent of its economic woes, China devalued its currency by more than 3%, sending shock waves around the world. This devaluation of the Yuan occurred because China’s economic model of export-led, investment-driven growth is in crisis. For decades, China has produced far more industrial goods than its population could afford to buy. Even now, 80% of the people in China earn less than $10 per day. This was not a problem so long as the global economy was booming. China could just export its surplus production to the United States and the rest of the world. When the global crash came in 2008, the world could no longer afford to buy more and more Chinese goods every year. China’s leaders responded to that blow by tripling Chinese bank loans between then and now. In that way, they kept the Chinese bubble inflated. However, that explosion of credit has now produced such titanic excess capacity across every industry that product prices are crashing and non-performing loans are running out of control (although they still remain well hidden from public view).
A 3% devaluation of the Yuan is far from sufficient to solve China’s economic crisis, which, at this stage, may not be manageable by any means whatsoever. However, a 3% devaluation does inflict significant pain on all of China’s trading partners. Chinese labor and Chinese exports are now 3% cheaper (and more competitive), while China’s purchasing power is 3% less. This explains why commodity prices tumbled further this week, along with the currencies and the economic prospects of the commodity producing countries such as Australia, New Zealand, Canada, Indonesia, Malaysia and Brazil to name only a few. Moreover, this was probably just the first move in what is likely to be a long series of devaluations over the months and years ahead. That means more global deflationary pressure and a more rapid slide back into severe global recession.
Books could be written about China’s problems and what they will mean for the rest of the world. A blog is not the place to do justice to this subject. So, instead of writing more, this week I would like to share a Macro Watch video with you. It’s called China’s Economic Crisis and it explains the nature of China’s serious economic troubles in 14 minutes and with 32 charts.
The link below will take you to the Macro Watch website. There you will find a direct link to the video (no password required).
The deflation (and possible implosion) of China’s great economic bubble will have a very profound impact on the global economy over the next 5 to 10 years. I believe this video will help you understand why this outcome was inevitable.