Oil prices are dropping as demand is slowing, it's all coming out of China. China, the worlds second largest economy is slowing down rapidly and as the saying goes, "when China sneezes, the rest of the world catches a cold". Time to have a closer look at China.....
""The Great Fall of China"". A debt fuelled economy since the global financial crash has led to rising property prices and general trends as seen in the west leading up to the GFC. Basically China has repeated the same failed experiment that caused the GFC and markets are correcting.
China has previously devalued yuan in an attempt to prop up their economy as it has transitioned more from a production based economy to a consumer economy. The problem with Chinas direction going away from a production based economy is that many mines and raw materials that it has in the past had need of are now slowing down in production. The wider problem with that is the mines etc are owned by many western investment funds and groups which will be affected. As China is slowing down it is also buying fewer western higher prices goods which further affects the western economies.
The direction of the China economy is going to get worse as the investment to GDP is slowing and the growth will drop to around 3% from 13% some analysts say. This is a deleveraging cycle that may take 2 to 3 years to play out. The China government has tried both fiscal and monetary policy and as they have both barely worked then the options are becoming more limited. To help keep the manufacturing part of the China machine (economy) turning, while western governments have been adopting QE, the Yuan has been appreciating. The only way for China to boost the economy has been to devalue its currency and make its exports cheaper so the west will pour more money into China and purchase these cheaper goods.
The global policy makers have no room to manoeuvre and the best thing they can do now is nothing. Interference of governments and central banks has caused this mess. QE in Japan, US, Europe and now China is a failed practice, it was a short term fix for a long term problem, primarily running economic growth by issuing debt which now (or soon) has to be repaid.
The Chinese government have told the media that they are not allowed to use terms such as "sharp fall or collapse" for fear of spooking traders/investors. The population has used social media to self study the latest market trends and this has shown a lack of trust in the governments ability to control the economy.
Contagion across the globe from China will prevent the much called for interest rates rises in the west.
There is now new fear in the stock markets but the ethos of a trader is to trade. The uncertainty will continue but there will be a rebound when the prices are seen to be at bargain values and people will jump back into the market. Reality will soon come back to the global market and another sell off will happen and that might be much much worse.
Jack