Protect Yourself From China’s Currency Contagion

Mainstream economists and media pundits have been telling people that problems in China are unlikely to cause serious problems in the United States. They point to the fact that China only accounts for a small percentage of U.S. trade, for example, and that the falling Chinese stock market has very little to do with our stock market. Unfortunately, they are missing the point.

China is now to the rest of the world what the U.S. housing market was before the 2008 financial crisis – it is the epicenter of global instability. And at the very heart of that instability lies the yuan.

Western investors may not realize that the yuan has appreciated by nearly 70% against the yen over the last five years, delivering a blow to China’s export position vis-à-vis Japan. And that creates a ripple effect that will be felt in multiple markets.

Here’s where the yuan is headed – and how you can protect yourself….

China’s Getting Crushed Under its Debt Load

After seeing its debt quadruple from $7 trillion before the financial crisis to more than $30 trillion today, China is left with massive overcapacity in its commodity industries. As a result, it is exporting cheap commodities to the rest of the world and pushing down global prices to levels that are bankrupting the global commodity complex.

And since China accounted for 75% of global economic growth since the financial crisis, that is a big problem – for everyone.Not just for the United States, but for China’s Asian neighbors and for Europe, with whom it conducts most of its trade.

Much of China’s $30 trillion debt was invested in unproductive assets such as ghost cities and ghost factories that can never produce the income necessary to service or repay these obligations. Somehow intellectuals, Wall Street and the financial media believed that China would defy the laws of economics and be able to transform hundreds of millions of uneducated rural peasants into productive urban workers with the snap of a finger. That was a triumph of hope and ideology over experience and reason.