Over the course of the past two years, many people have been talking about how the United States is going to have hyperinflation due to the massive printing of money by the Federal Reserve. However, in many ways, the country that is more likely to have the hyperinflation potential is most likely China. Today, we see headline that Chinese inflation is jumping by 3.5%. While some of that is due to the country’s continued asset bubble mainly real estate developments, most can be attributed to the reality of China’s de facto peg to the U.S. dollar.
This can be explained easily by the fact that China has to constantly print more money to balance out its trade surplus. The following simple diagram explains this process:
Because of China’s de facto peg to the dollar, all the trade surplus that China is having is going to the country’s foreign reserve account. The central bank in turn has to constantly print Yuan (RMB) to pay its exporters. Thus, it is almost as if China has to print as much of its own currency as the U.S. trade deficit.
This by itself is going to cause a significant amount of inflation and soon or later it’s going to get out of control. Here is the potential disaster if indeed China loses control of its inflation:
It will “export” this massive inflation to virtually every corner of the world because of all the cheap goods it makes for the world. At this point, it is not even necessary to go on talking about other effects. This will have a profound impact on the world economy and possibly on the social stability of the fastest growing economy in the world.
But isn’t the question…when will this become a huge problem as we are trading the market now..I do agree that china and for that matter all economies, will have to pay the price of this mess eventually, but the news out of china this weekend looks like for the near term, things are being managed quite well..so are you thinking this will blow up in 6-12 months or 2-3 years?
Timing is always difficult. I am writing this article as a forecast that the overall stock market will be a traders’ market because buy/hold investors will continue to suffer as we go through this long economic cycle and we might be in for bigger things down the road.
My guess is that things would be more clear as China approaches the 2012-2013 change of power. So we are talking about 2 to 3 years down the road, which is more likely than say 6-12 months down the road.
we should see another bubble in coming years in China stock market and follow with a crash just like what we saw in 2008 US, so that means to me that no crash for now in the US market as US will be following China market most likely. I will watch big boys and will where they go though.
SWBB
Sam,
The Chinese government relies more on the real estate market to continue to buoy the Chinese economy not the stock market. That is why most of the stimulus went to the real estate sector as oppose to the stock market.
Real estate can affect stock market very well, so if there is a bubble in real estate is going to appear that bubble certainly would go to stock market as well. I was talking about the inflation in china, That inflation that is caused by printing money or whatever else would cause a rally in chineese stock market and then as we know us market also would follow Asian and european market, so if big boys want to make another fake rally in us market they can use inflation in china as a excuse to push us market up. that means we can see 1500 will be taken out in S&P as result of inflation in china that could spread in to world.
Which ETFs should be keeping an eye out to buy or short if we’re counting on this to happen?
CNY? CYB?
This is quite complicated. Would the Chinese government then rush to U.S. dollars or dump them? They are likely to dump them to protect the Yuan but the opposite could happen too if everyone loses their confidence in the currency. I don’t know you would probably be ok to bet against China and commodities. So you can short those related ETFs.