Repricing – Financial Markets – Week 4

Global Markets and China:

We continue to be concerned that the Chinese banking system is struggling even though it has just been bailed out for the third time. In fact, the entire Chinese economic system is a bubble waiting to burst.

The global economy is so intertwined, it is impossible for one country’s economic activity to not impact the rest of the globe. Especially when the country is a big player like China.

Chinese banks have been playing games providing high yielding investment products in a manner that has not been regulated. The bank regulators in China have begun to force their banks to reduce these products.

If the bank regulators in China are successful in forcing the banks to pare back some of their “creative” loan products, the normal result will be that those banks will have to (1) raise equity in order to have an additional capital cushion, or (2) they will have to cut back on their loan portfolios, or (3) some combination of the two.

Whichever of those three alternatives occurs, this is a significant reduction in the amount of capital available to the second largest economy in the world. The result will impact the global economy and the re-pricing of all assets will occur.