Message Of China's Meltdown: The Growth Miracle Is Over

Investors Busniness Daily ^ | 07/27/2015 | IBD Editorial

[expat_panama]

Markets: China's stock market retreat has turned into a panic and, despite massive intervention, its government is helpless. Fact is, after a long period of super economic growth, China is downshifting to a much lower speed.

China's benchmark Shanghai Composite plunged 8.5%, the biggest daily loss since 2007. Of course, the market is largely retracing its extraordinary 150% surge over the last year or so. Still, since their June peak, Chinese stocks have plunged 28%, or roughly $1.9 trillion.

Reuters calculates that the government of Xi Jinping has spent close to $800 billion — or nearly 10% of China's total GDP — trying to halt the market sell-off. But if anything, by increasing investor uncertainty, it's made things worse.

"When Xi Jinping came to power, there were a series of hints that market-based capitalism would be allowed to move forward under his leadership," Evercore Partners founder and former U.S. Treasury No. 2 Roger Altman told CNBC's "Squawk Box." However, "at the first real threat, they've fallen over themselves to impose government control."

We've disagreed with Altman on many things over the years, but on this he is dead-right. Goldman Sachs estimates $761 billion in capital has left China over the last year. That's not exactly a vote of confidence. But behind it all, China's stunning market decline holds a bigger message: The nation's long growth miracle is over.

[MeneMeneTekelUpharsin]

The Hang Seng index will end up at about 2500 and the Dow will end up at about 10500-11000 within about 2 years.

[CincyRichieRich]

Let’s see:

* no real accounting standards
* communism with all it’s bells and whistles
* government buying stock
* ghost cities
* toxins in manufactured goods shipped around the world

What could go wrong?

[catfish1957]

I don’t like the Chicom’s one bit, but with their debt to GDP level so low, I sure think their future is better than ours.

[Flick Lives]

Chart looks like a classic “head and shoulders” formation.

[catfish1957]

Dow will end up at about 10500-11000 within about 2 years.

I am guessing a correction even worse than that. DOW 7-8K is my guess, and a deflationary 30's type of economy.

[proxy_user]

Well, it sometimes looks like command-and-control economies can work better than capitalism. Singapore and Japan are good examples. They got so far, and then they ran into a wall.

[notdownwidems]

I am guessing a correction even worse than that. DOW 7-8K is my guess, and a deflationary 30's type of economy.

If it turns out that you are correct, what actions can an individual take to protect himself? Or are there any?

[expat_panama]

looks like a classic “head and shoulders”

It sure does.  Just looked at the long run and--

--it seems that not only is this not the first big China crash, but the last time their index lost over 2/3 of its value.  On top of that, it preceeded by a year the big U.S. crash. There are still bargains there but let's face it, China's equity markets as a whole are a tiny volatile niche.

[Lurkina.n.Learnin]

” Which politicians do you trust to run the country?”

Not a damn one of them.

[painter]

I would be interested in that too.

[Straight Vermonter]

I think what China is doing is driving down the price of Gold since they are, I believe, due to receive this years payment on our debt to them, in the billions, in gold.

Have you ever owned a treasury bond? The debt that is owed to them is simply in the form of bonds just like you could buy.

All the other things you hear related to China and US debt is nonsense.

[woodbutcher1963]

I have been pointing this 10 year chart out for a week.

This is like dejavu all over again.

It will probably end up in the 2700 range eventually. Whenever it looks like it is bottoming out check out Matthews China Fund. I have owned this fund and sold it on two different occasions. Another one that may trend up faster will be Matthews India Fund.

All these developing economy funds have wild swings from year to year. They are a little like gambling. However, it is a way to invest in these regions without having to pick an individual stock.

China will rebound back. The fact is the have 1 billion people. While some are billionaires, many of them can not afford an automobile. Their economy will still grow faster than ours or Europe or Japan.

[catfish1957]

If it turns out that you are correct, what actions can an individual take to protect himself? Or are there any?

It is impossible to answer that question since every person's financial situation and goals, etc are different. I can give my advice of 35 yrs. of investment and success that I navigated through '87, '00, and '08 crises. Take it for what it is worth.

1. Priority 1 should be eliminating or reducing debt. I view debt payments by default as negative income.

2. Competitively bid all aspects of your expenses. Get the utmost value down to the penny for everything you buy, or services you secure. Over years and years, you would be surprised how much this adds to your net worth balance sheet.

3. Keep your investment portfolio that is intended toward goals... i.e retirement as an example, in strong conservative investments. When you have those bases covered, then you can look at speculative plays.

4. I invested zero in the dot coms in the '90's. My father gave me the best advise of all in that era.. "Why would you ever invest in anything that doesn't make money?" To me that rules still applies today.

5. I have found that the simple rule of putting 100- your age in equities worked pretty well for me. Maybe not for everyone, but........

6. Research and "like". When investing, I tend to get into stocks which I think have good products that I like. Before getting in I research it to death too. A Low P/E is often a good indicator. Furthermore, is there a long term demand for the product too.

7. The best time often to invest is when everyone is rushing out the door. The is the toughest part, but finding a price bottom, is golden toward finding long term return.

8. Monitor investments and net worth monthly. Research, evaluate, and adjust as needed.

9. Don't fall in love with a stock/fund/etc. so much that you resist selling when the fruit is ripe. Don't forget that your favorite stock is not a family member.

10. Never forget that a SHTF scenario is always a possibility. Remote, but still there. Have a base amount of investments that will address. Metals, Land, etc.

[Kommodor]

That’s some good advice there. I’d add one thing:

Don’t buy crap you don’t need.

Been there, done that, got in the credit trap, got back out of it, wish I’d never done it.

Love my Pontiac Solstice, but still not sure if it was worth having to work another year into my 60s.

[catfish1957]

One I forgot, and again maybe most important

11. Formulate a budget on three levels,... normal, austerity, and emergency. Adjust it annually, and adhere to it religously.

[GOPJ]

Growth Miracle Is Over

I think the ‘growth miracle’ was over some time ago but the leaders of a command economy were able to cover it... Fake cities, fudged books, etc.

[Flick Lives]

--it seems that not only is this not the first big China crash, but the last time their index lost over 2/3 of its value. On top of that, it preceeded by a year the big U.S. crash.

Interesting. I don't remember the 2007 meltdown. Looks like history is repeating itself.

[American Constitutionalist]

I ain’t got no money, so I ain’t losing any money in China.

[21twelve]

Thanks for the good advice!