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August 23, 2015 - Chinese Intervention Accelerating A Downward Spiral

You will hear "despite" intervention by the Chinese government, the stock market continues to fall. The word should be "because."

This isn't a blanket statement against government monetary policy. There are times when intervention is needed. But if when a one-party government that cloaks basic economic statistics in secrecy and has a history of currency manipulation tells you that everything is fine at the same time its making panicked moves, you can't blame individual investors from panicking and fleeing the scene.

Moreover, what political legitimacy exists in China rests on economic progress in the country, so all sorts of problems could be around the bend.

President Xi’s government has promoted stock market investment to the general public for a while. With the stock market plunging despite (read as: “because of”) government efforts to prop them up through purchases, his reputation along with the savings of large and ordinary investors is waning rapidly. The sudden drop in the market came on the heels of a surprise devaluation of the renminbi, another government move, which indicated to investors that the Chinese economy was in worse shape than expected.

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But nobody really knows. China keeps much of its official data secret, lacks reliable employment statistics, and is generally opaque in every way. But consumers, many who just lost money on stocks, are retreating quickly, and that could spell disaster for the economy.

Meanwhile, Chinese censors are going after media outlets and journalists who are reporting on the crisis outside of approved terms. It’s 2015, and the Chinese population is not North Korea’s. They know how to access news via sources like WeChat, and you have to think that the need to go around censorship to get fair economic news is not going to help consumer demand.

Chinese debt, again hard to measure with precision because of the inaccessibility of data, is also a potential powder keg. According to some reports, China’s debt is nearly 300% of GDP, and many loans are linked to the real estate bubble that many analysts think is about to burst. Many others were taken out - often in the unregulated shadow banking system in China - by those speculating on stock prices, which are now collapsing. So China is in trouble, and has the potential to put a serious drag on other economies around the globe.

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