January 17, 2017

China going broke may spook the markets?

“China is going broke. This statement comes as a shock to those who have heard over and over that China is a rising economic superstar and will soon be the greatest economy on Earth, surpassing the U.S. in the No. 1 role.”

How can China be going broke? Jim peeks beneath the surface:

China started 2015 with about $4 trillion in hard currency reserves. About $1 trillion fled the country in 2015 and 2016 based on fears of yuan devaluation. That’s classic capital flight.

Another $1 trillion is relatively illiquid, including direct investments in mines and natural resources through sovereign wealth funds such as China Investment Corp. That’s wealth, but it’s not money that can be used in a liquidity crisis.

Finally, $1 trillion has to be held as a precautionary reserve to bail out China’s insolvent banks and Ponzi-style “wealth management products.” Failure to bail out the banks… could lead to social unrest that would topple Communist rule, so that won’t be allowed.

“That,” says Jim, “leaves only $1 trillion of the original $4 trillion in liquid form.” And if it keeps jettisoning dollars at this rate, “China will be devoid of useable liquid assets by late 2017.”

Those are the stakes. Which brings us back to another possible devaluation…

Read more at https://dailyreckoning.com/china-may-soon-shock-market

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