Europe Now, China Next…

The events that are unfolding right now makes perfect sense from a global struggle for supremacy point of view. Specifically, the United States will likely emerge from the financial crisis since 2008 once again as the strongest country in the world within the next few years. The plan seems simple – trigger a domestic financial crisis that will shock the rest of the world. The United States took the hit first, and in turn causing a much worse financial/economic collapse in Europe and then likely in Asia.

The unstoppable plunge of the Euro is already taking place and the prospect of 1:1 USD/Euro exchange rate is already in sight. Country after country, Europe will fall into economic ruins fairly quickly. So far the casualties are Greece, Iceland, Portugal, Spain and now Hungary. The sovereign debt crisis will spread like a plague soon infecting other European nations as well.

The modern economic warfare campaign will continue its destructive path into Asia next. Its main target: China. China is fatally threatened  on two fronts: its currency the RMB and its real estate bubble.

China is currently being pushed to end its RMB peg against the US dollar. Once the Chinese currency appreciates, the Chinese economy will be seriously impacted. An overwhelming part of the Chinese economy still depends on its export, mainly to United States and Europe. A stronger Chinese RMB would make its exports more expensive and cut into the profit margins of Chinese exporters. At the same time, a more valuable Chinese RMB would increase more imports into China. This situation completely reverses the method that enabled China to prosper in the first place. The fact is that China simply cannot sustain its economic growth without being a super net export nation. Any disruption in its export growth would cripple its economy.

The appreciation of the Chinese RMB will give the United States the perfect opportunity to start “erasing” its debt owed to China. Because the debt owed to China is priced in US dollars, the relative depreciation of the dollar would make United State’s debt to China less on a relative basis. In addition, United States can also take advantage of the more expensive Yuan by exporting more goods to China.

The more serious threat that China is facing is its real estate bubble, currently getting to a point that a collapse would spell the end for this country’s economic growth. The fact is Chinese real estate stocks are collapsing the second time after being re-inflated by China’s trillion yuan stimulus package. Year to date, the CSI 300 Real Estate index plunged 40%, much more than the general Shanghai and Shenzhen stock indices as illustrated by the chart below.

Real estate stocks are usually leading indicators of actual real estate prices by a few months. Despite such horrible performance of real estate stocks, properties in China continue its rise into May of this year. Re-inflating the real estate sector using the trillion-yuan stimulus package during the 2008 financial crisis  is likely a serious mistake on the part of the Chinese government, because the result of that action is the tremendous amount of additional property inventory on top of an already burdened real estate market. There is simply no demand for the majority of the newly developed properties. Even if many properties change hands in various transactions, most of those transactions are for speculative purposes with no one really end up occupying the property.  In many cases, state owned enterprises are artificially inflating the prices of land and developments by using state money disregarding any kind of financial consequences of such actions. Can anyone imagine the United States government buying up million of houses and artificially propping up property prices? Such a scenario is absurd and is bound for failure yet the Chinese government did exactly just that.

Thus, the collapse of the Chinese real estate bubble on top of the collapse of its export growth caused by United States’ pressure for the RMB appreciation will likely send the Chinese/Asian economy into further chaos ending China’s current prominent economic role. A Chinese economic collapse will help to erase much if not all the debt owed to it by the United States.

In the end, it seems like everyone will be losers but the United States could actually benefit from the collapse of Europe and China, making it much better off.