Rahul has graduated in Economics and is a CFA Level 3 candidate. He started his career as an Analyst in McKinsey & Co., specializing in Macro Economics. He is currently heading the Fundamental Research Analysis team at Kredent Brokerage Services Ltd.

 

Over the past few weeks the most haunting fear that the world is facing is the outbreak of swine flu and there were fears that this could lead to a slowdown in cross border business and financial activities and thus the fall in the global markets.


Though the fear concerns are justified to some extent, however this fear is far less a threat to the global financial system than the much talked about Chinese bubble. Many people are just taking this very casually, but this current Chinese bubble is of a very serious concern. The kind of overcapacity China has build up over the past few years is way too much.


The Shanghai Composite has nearly doubled from its lows last November, leaving the rallies in Western bourses in its dust. The rally in China also has produced the frenetic trading that are hallmarks of a bubble. But this kind of liquidity driven rally is hard to sustain and eventually leads to the burst of a bubble.

With the Chinese bubble bursting, the global commodity markets will also come to a stand still and as a matter of fact the weight of the sectors that are commodity driven is over 40% on our benchmark indices. Any further slump in the global commodities will break the back of our benchmark indices and lead to a severe fall.

The Chinese bubble is completely liquidity driven which is slowly starting to burst. The idea is very well expressed in the following quote:


Chinese asset markets have become a giant Ponzi scheme, writes the highly regarded former Morgan Stanley Asian economist, Andy Xie. "The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn't enough liquidity to feed the beast."


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