The US president has so far managed to keep the market buoyant by offering economic hope to calm nerves. As China’s economy continues to slow, and more multinationals begin to feel the pain, the tipping point may not be too far off...
China’s property bubble is bigger than the US stock bubble. It is likely to be over five times GDP in value. The hot air in the price accounts for more than 50 per cent. Most of China’s debt, which now tops 300 per cent of GDP, is backed up by property. It can keep going only if the debt continues to rise faster than GDP. Any deleveraging campaign, which the country tried a couple of years ago, would pop the bubble.
The Chinese government can intervene in a market process in all of its aspects. It can restrict buying and selling. It can change expectations by massaging statistics or media content. The end goal seems to be to stage a silent explosion, adjusting the market without people realising it, like slowly boiling a frog. Chinese bubbles don’t burst; they just fade away.
The adjustment in China’s property market was the main factor in the global economy slowing. The Trump bull market has mitigated some of its fallout in the past two years. If the Trump bull market bursts, a global recession is inevitable and could be quite deep.
And a debt crisis may return in Europe. With national debt at 131 per cent of GDP, Italy looks really dicey. A global downturn could tip it over, which would blow up Europe’s banking system.
If and when a recession arrives, it would be difficult for the world to come out of it. The structural problems that led to the 2008 global financial crisis have only become worse. Debt leverage has risen among all major economies.