• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Financial Services

China and a Lehman Moment

The question is the impact on foreign investors and  global markets.
By ROGER ARNOLD Jul 17, 2013 | 11:30 AM EDT

Bank loan rates temporarily spiked in China in the middle of last month and Fitch issued an ominous report on the country's debt with the situation. The situation was well explained by  Ambrose Evans-Pritchard.

 The spike in interest rates, most notably the seven-day repurchase rate and the Shibor, is indicative of what I refer to as the "simultaneous collective epiphany", the point at which everyone realizes all at once that there is a problem.

 Since then, however, the interest rates have fallen back and the crisis that appeared imminent appears also to have passed -- for now. But what's been done can not now be undone. In the words of Maya Angelou: "The first time someone shows you who they are, believe them." The same may be said of markets.

 One of the prime drivers in market action is confidence gaming, which takes two basic forms. The first is what most of us are familiar with -- the markets and the preference of the media and society for good news and optimism. This occurs overtly and obviously; and there is nothing wrong with that.

The second form is more covert. It is the denial of bad news; "see no evil, hear no evil, speak no evil". This form of confidence gaming allows for plausible deniability for market participants in the event something goes wrong.

This is what occurred during the creation of the subprime debacle and was epitomized after that bubble popped. The leaders of the U.S. financial industry closed ranks around the idea that they could not have seen the crisis ahead of time. Thus, the crisis was not their fault because there was no model for falling home prices.

This was an absurd idea but it has gone unchallenged by regulators and the boards of directors of these financial institutions.

As for China, their debt situation has been obvious and growing. This is especially the case since the massive preemptive financial stimulus measures were taken by the Chinese government after the Lehman crisis. That was an attempt to prevent a negative impact on the Chinese domestic economy. Yet, few institutional organizations have been willing to acknowledge the issue publicly.

Fitch's downgrade of China's long-term currency rating in April and report on its debt situation in June was the most recent acknowledgement by an institution that can't simply be waived off by investors or other interested parties as an isolated bearish stance by an individual or smaller organization. The plausible deniability part of confidence gaming by way of willing obtuseness is now gone and interested parties must confront a more complex reality with respect to the situation facing China.

The principal issue facing China now is what is called the middle income trap.

As a country moves from developing to developed status, its domestic economy goes through three principal phases: infrastructure development, manufacturing and real estate development and finally, technology.

In the early phases the country attracts foreign investment with cheap labor and the countries economy is export driven. As the success increases, the country creates a middle class which also causes the labor advantage to go away -- giving rise to the trap.

China was already on this natural trajectory before Lehman Brothers failed. The Chinese government's monetary and fiscal stimulus would have been used to attract foreign investment in long-term capital intensive technology development in China. That could have afforded the country the opportunity to grow out of the middle income trap and to attain and to maintain developed economy status. That stimulus was used instead to prevent the country from collapsing economically in 2008/2009.

The majority, and perhaps all of that capital, has been consumed with no positive residual economic multiplier. Left behind was both the sovereign debt and private sector debt.

If the Chinese economy slows further from here, any more counter-cyclical monetary and fiscal stimulus will immediately cause price inflation. That will result in a slowdown of the economy, and soon thereafter a popping of the private sector shadow banking debt bubble. That will immediately cascade into a popping of the debt bubble being experienced by the state run banking system.

This will lead to debt deflation and real deflation as losses are absorbed. This is a part of the natural, necessary, unavoidable and imminent process to potential recovery.

The principal difference between the situation facing China today and that which the U.S. faced after Lehman failed is that the U.S. had the sovereign capacity to counteract the private sector economic contraction and capital losses with monetary and fiscal infusions.

China already used their financial capacity to do the same with their monetary and fiscal stimulus following the Lehman failure.

The real questions for investors to consider now are these: When China experiences its Lehman moment, how it will impact foreign investors in the country? And how it will impact the rest of the world's financial markets and economies?

I will address those issues in future columns.  

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Investing | Global Equity | Rates and Bonds | Markets | Financial Services | China | Economy | Stocks

More from Financial Services

The Russell Looks Ready to Rumble

Bruce Kamich
Jun 6, 2023 1:48 PM EDT

The charts tell me that the small caps could turn higher soon.

The Financial Fund XLF Is Starting to Look Like Money in the Bank

Bruce Kamich
Jun 5, 2023 12:00 PM EDT

Let's check the charts of the Financial Select Sector SPDR exchange-traded fund.

Bearish Bets: 3 Stocks You Should Consider Shorting This Week

Bob Lang
Jun 4, 2023 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

For Stability and Quarterly Payments, You Gotta Have FAITH

Jim Collins
May 31, 2023 1:01 PM EDT

If we believe normalcy will return to the U.S. financial system, this investing plan could give outsized returns.

Here's When I'd Be a Buyer of Marsh & McLennan

Bruce Kamich
May 25, 2023 2:14 PM EDT

Let's review the charts and indicators.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 07:19 PM EDT CHRIS VERSACE

    AAP Podcast: This Company Is Not Going 'Solo'

    Listen in as I talk with the very diversified Solo...
  • 01:51 PM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Adjusting Your Trading Approach to Shifting Market...
  • 06:54 PM EDT CHRIS VERSACE

    AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

    Listen in as the Action Alerts PLUS Podcast tackle...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login