Stock markets have been anything but stable for the first week of 2016. The Dow has lost over 1000 points from its recent highs. Billionaire investor George Soros is predicting on Bloomberg a 2008 Déjà vu. The only difference is that it is China’s economic decline that is causing this one. China’s stock market was screaming to new highs as recent as June of last year. Suddenly, there was talk of an economic slowdown.
He points out that China’s economic growth had been taking place at double digit levels. In 2014 their growth rate fell to only 7.5 percent. Though that is still positive, many were riding high on the gravy train of a booming marketplace. The announcement of a slowdown hit global markets severely. In a state of panic, the Chinese government rapidly starting devaluing the yuan. (Chines currency). Soros claims that this devaluation is putting China’s problems they are experiencing into the rest of the world.
Chinese Housing Market
Soros comments bring back the fear that hit the U.S. markets in 2008, when it was realized that that the banking industry had been too lenient with giving mortgages, to people who could not really afford to pay them. At the time, most people thought that housing prices would never drop. They were wrong and it created a major panic. This appears to be happening now in China.
China is facing a housing market bubble, similar to the one in the U.S. in 2008. It has been reported that there are “ghost cities” in China, where investors have built huge skyscraper apartment buildings, that to this day, stand empty.
How China Effects the World
Many countries buy and sell products to China. Those who sell products to China, are being hit by a downturn in demand for goods and services. In this respect, China is effecting the whole world. As economic growth cools in China, it eventually drifts to other countries who do business with them.
Recent indicators that measure fear in the equity markets, like the Chicago Board of Options (CBOE) VIX index, recently as high as 27 (a high reading) show that many people are fearful and are exiting the markets. With many countries looking at lowering their interest rates in an effort to stem the blood bath, the U.S. Fed has now started the process of raising rates. Will this lead to another recession in the U.S.?
George Soros comments only push the numbers farther and faster. His recent comments in Sri Lanka, are confirmation of most investors’ fears. China is not in negative growth yet. Many wonder how hard the U.S. equities markets will be hit when they are.