China is the world’s #2 economy after the USA. It has the world’s largest real estate bubble. That bubble has popped. The losses will be enormous.
China is also facing price inflation, especially of food. Why? Because of its monetary inflation. The central bank has been goosing the economy with fiat money for a decade. Rioting has been increasing, although this is not reported in the West.
The government ordered the central bank to stop inflating a year. It did. This has now popped the real estate bubble.
The government has ordered the central bank to cut interest rates. The New York Times reports:
For more than a year, the Chinese central bank tried to squeeze the country’s banking system in hopes of restraining inflation. Its action on Wednesday’s indicated that China’s government feared the country’s growth engine was starting to falter.
On Thursday morning, the Chinese government released its latest monthly survey of purchasing managers, which confirmed spreading weakness in the economy. The index dropped to 49.0 in November, from 50.4 in October; any reading below 50 suggests a slowing economy, and the November figure was the first below 50 in more than two years.
This policy of re-inflating will not work as planned. The real estate market is unlikely to recover. The panic will spread.
The Chinese stock market has been falling for months. The Hang Seng index was at 25,000 in April. It is now at 19,000. Now the industrial sector is beginning to decline.
This is all explained by the Austrian School of economics. I predicted this in May 2010. I thought the slump would begin in the spring of this year. It has taken a few months longer.
The Chinese economy is dependent on ever-greater quantities of fiat money. The central planners are now trapped.
If China goes into a full recession, its export-oriented companies will start cutting prices. This will put added pressure on Western manufacturers.