Big Trouble in Little China

While the US basks in a moment of diminished stress – political shenanigans have abated, the Eurozone isn’t threatening to vacate its currency, America’s economy is puttering along, markets are good, and all the current wars are old wars as opposed to new wars – China is quietly suffering. How much is hard to tell but signs include periodic interest rate spikes that affect loans between banks, slowing growth, and simultaneously rising rates on corporate bonds.

Over the years we in the West have read about property speculation and “empty cities” in China. Funding all this growth has been a priority so the government can show strong economic statistics and push immigration into cities but with the change in leadership recently, authorities are shifting course. Debts are too high and defaults at banks and other entities dangerously near. Government spending is being reduced and redirected and banks are being brought to heel. China would like to shift from investment in buildings and plants to investment in consumption, transportation, environmental clean up and efficiency projects. These spikes in rates are in one sense a measure of its progress.

With one of the world’s largest economies masterminding such a shift, our companies and markets stand to either benefit or suffer depending on product lines. China has long been a large consumer of heavy equipment, metals, building materials, energy, and gold. Looking forward, fewer excavation machines might be sold, while more robotics and medical equipment go out the door. But in the meantime, China must manage this transition, without igniting its own form of subprime crisis.