2016 Is Off To The Wrong Start

The new year is off to a wonderful start. China is struggling to find balance, it has devalued, and small and medium sized companies are often in default on their shadow bank loans. The volatility of the stock market is much less important than what it signals, which is the government is not able to find the right tools to revive the economy without much more difficulty. As a result of the corruption crackdown many things at banks and at government offices are ground to a halt, as most do not know how to function without the normal graft and payoffs. The typical loan officer got paid 10% of the loan amount personally so he was incented loan the maximum. Officials got 10% of the deal or cash to approve development, so approvals of even dumb deals were given.  The government was trying to employ the maximum number of people, and to build the country’s industry and infrastructure, so all sorts of projects needing government or state bank funding got funded. The result is much got built and over leveraged that never should have happened, and China now is similar to the US in 2008. This is going to take years to sort out and probably one or two more devaluations.  Result is oil stays low, commodities stay low, and many countries that supply China remain in worse and worse trouble. To try to protect the currency, China has clamped down on capital flight and has made it much harder to move capital out. However, in good Chinese tradition, for a 10% payment it is possible to do. That is a lot of extra cost for investors to carry and possibly will mean they will want higher returns from investing here. It will also mean less cash comes out than might have. Because the Chinese economy is much more troubled now, and cash is tight, there will be a lot fewer tourists coming from China. China will disrupt the world economy for several more years.