It wasn’t long ago, just the beginning of 2016, when China dominated the financial news. The reason was that its stock market was in freefall and foreign capital was fleeing the country at record levels. In a move that shocked world markets, China issued a sudden devaluation of its currency, the yuan, also called the renminbi.
The shock devaluation of the yuan meant that any institution holding China’s currency suddenly found it had lost money. Any assets they held that were denominated in the yuan, like interest in a Chinese business or stock in Chinese companies, were similarly devalued. So great was the shock that investors around the world rushed to cash in their Chinese currency and assets. China’s stock market cratered and foreign capital fled the country.
Falling Out of the Headlines
China managed to slow the pace of currency devaluation by limiting how far its currency could fall in a day and its overheated stock market finally found something close to a bottom. The rest of the world moved on, global markets recovered and other news crowded out China’s currency woes and the crisis fell out of the financial headlines. The media spotlight shifted to the U.S. presidential election, the Brexit vote and the Olympics.
Problem Still There
But the underlying problems China was facing hadn’t gone away; we just stopped hearing about them. Meanwhile, the slide of the yuan was matched by the slide of the euro in the wake of the Brexit vote. China put in place artificial constraints that allowed the yuan to devalue slowly; slow enough that the depreciation managed to stay out of the news but, once again, the problem was still there. In June China dropped the value of the yuan a full one percent against the dollar in just one day.
Debt Bomb Set to Detonate?
At 160% of its GDP, China has the highest corporate debt ratio in the world. Companies there are in so much debt that nearly half of new debt is borrowing more money to pay against old debt. The IMF warned that China’s bad corporate debt could amount to seven percent of its entire GDP, a figure that could rise to fifteen percent by 2019 unless drastic changes are made. Unfortunately this doesn’t seem to be a priority for the Chinese government.
Collapse Could Happen Again
Capital continues to flee China and it appears the Chinese are masking the true outflow by puffing up trade valuations. When China was one step above a third world nation, no one really cared if its currency collapsed. Now that China is the number two economy in the world, that threat is far greater. Analysts are now sounding the alarm that a sudden collapse of the Chinese banking system could trigger a global market panic along the lines of what we saw in 2007—and are still recovering from today.
It’s another reminder that we live in a globally connected economy. Sloppy financial management halfway around the world can derail your retirement dreams, even when domestic markets are doing well in comparison. A smart investor will hedge stock market gains by converting some of those high flying stocks into liquid hard assets, like gold and silver coins.
By keeping a percentage of your wealth in hard assets, you insulate yourself from destructive financial follies both at home and abroad.
