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Will U.S. and China Trigger Another Global Financial Crisis?

Written by Dennis Ng on .

Welcome to the 132nd Issue of Weekly e-newsletter by This week I like to share with you "Will U.S. and China Trigger Another Global Financial Crisis?”.



Why Fear Continues, because Problem is not Solved!

Why despite EU’s announcement of 1 Trillion US Dollars of financial assistance schemes to save Greece the global stock markets continue to fall? The reason is the “huge debt” problem faced by Greece, are also common problem at other countries, such as Spain and even U.S.

For over 15 years, Greece's economy has already lost its competitive edge, but Greece continued its generous "national social welfare system", together with Greece's political corruption, tax evasion, many wealthy people pay little tax, which led to Greece government accumulating Budget Deficit. Over time, because of deterioration in its status, led to the current credit ratings of their country relegated to junk status. 


Therefore, the "Root" of Greece's problem is Greece's loss of competitiveness of the economy and also excessive debt, and this problem is NOT going to be solved by pouring more Money (Debt) to Save Greece.

For year 2009, Greece's government budget deficit is 13.6% of its GDP (Gross Domestic Product). However, other countries similarly face high levels of Debt. For example, the Portuguese government budget deficit accounted for 9.4% of GDP, Ireland is 14.3%, Spain 11.2% and Italy 5.3%. Therefore, the market worried that after Greece, that other European countries will also have a debt crisis. 

When a country faces economic problems, often the country can devalue its currency, which will reduce the price of their goods in order to stimulate exports. However, the EU's 16 member countries share a common currency - the euro. Thus Greece and other European economies cannot have monetary autonomy, and cannot choose to let the currency depreciate.


The Risk of Domino Effect

Sensing the weakness of Greece as Opportunity, hedge funds and other speculative funds took the opportunity to drive down stock prices and exchange rate of Euro, to make speculative gains by shorting stocks and attacking Euro currency. 

After Greece, which is the next country likely to have a debt crisis? Portugal, Ireland and Spain, seem to be the likely candidates.

Therefore if markets continue to plunge, this is likely to result in domino effect, almost a repeat of the Asian financial crisis when the stock market and foreign exchange markets in Thailand after being attacked, Indonesia and the Philippines also were attacked which eventually evolved into the Asian financial crisis. 


United States and China are the key to Global Recovery

The U.S. economy accounted for 21% of the global economy, while China was 12.5%. Therefore, whether global economic recovery can continue, especially when the other major economic zone Europe is likely to slow down, the United States and China's economic performance will be crucial. 

The latest data showed the U.S. economy seems to continue to maintain growth in 2010, the first 3 months of economic growth for 3.7%, Standard & Poor's 500 index's 460 companies reported profits increased by 55% from a year ago. In April 2010, U.S. recorded an increase of 300,000 jobs. Therefore, pending unforeseen circumstances, the U.S. economy will continue to recover. 

On the other hand, China's economy showed that there are signs of a slowdown, China's Shanghai stock market was the first stock market to bottom out and recover in the Financial Crisis in Nov 2008. However, in August 2009 the Shanghai index rose to 3,471 points, but never rise back to this level thereafter, but continued to fall to about 2,600, or a drop of more than 25%.

Usually if the stock market fall more than 20%, may indicate that an upward trend in the stock market has ended, therefore, in the short term if the stock market in Shanghai, China does not rebound to 277.7 points or more, then China's stock market may be the first country to declare the end of the “Bull” market .

Usually the stock market is ahead of the economy by 6 to 9 months ahead. Therefore, whether the stock market in Shanghai is “hinting” that China’s economic outlook for 2011 will not be as good as year 2010? If China and the U.S. economic slowdown, the global economy might fall into a “double-dip” recession (or W shape recovery).

China's real estate market outlook is also not optimistic as the Chinese government has introduced policies that seek to restrain the rise in housing prices. Recently, first-tier cities such as Shanghai and Beijing seem to have signs of housing market cooling down. If the Chinese economic slowdown significantly, then there is an increased risk that China's real estate market may Crash (fall by over 30%). Therefore, the Chinese government policy must be well balanced to avoid stock market crash and the collapse of the real estate market.

Recently, investors have been selling other currencies, such as Euro, Australian Dollar and even S$, to buy US$. However, the fact is U.S. debt is also quite worrying, the government budget deficit accounted for 10.6% of GDP. In fact, the European Union as a whole, government budget deficits is lower than the United States, accounting for only 6.9% of GDP.

Therefore, if global investors start to worry the fact that United States may also face a “Debt Crisis”, that might lead to another Global Financial Crisis.


Note: above is just my personal opinion. This e-newsletter is not giving you advice.


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