Why China Could Be Heading Towards an Economic Collapse

China Economic CollapseBrace for a China Economic Collapse

China is struggling to find growth and this has spread like a wild fire around the world, wreaking havoc in many emerging and developed economies. The Chinese stock market is holding up but you get a sense problems could be brewing behind the Great Wall.

The situation in China could worsen if the expected Republican nominee Donald Trump wins the White House in November. Of course, this is if he holds true to his words and punishes China for its current trade agreement with the United States.

I’m not going to get into the politics, but China could see a financial and economic tsunami surface if much tougher trade agreements are put into place. This is why Beijing has shifted its economic model from one depending on manufacturing and foreign investment and demand, to a model similar to the United States in which consumer spending is largely responsible for expanding the economy.

So far, about five years into the strategy shift, the Chinese economy is slowly shifting gears, but the problem is that Chinese consumers are holding back on spending.

In my view, it will take many years for the new Chinese model to work and, of course, the path will be littered with many hurdles.

If China can successfully adapt its economy to one driven by its 1.34 billion citizens and also work on closer economic ties with India, Russia, and other markets in Latin America and the Africa subcontinent, then it would not have to depend as much on the United States, especially if trade barriers arise in the future.

The Chinese Bears Are Prowling 

In the short to immediate term, I remain neutral to slightly bearish on China and the Chinese economy.

The Chinese stock market is a mess and the country’s financial and real estate markets are vulnerable to a real nasty decline if Beijing fails to prop it up.

Activist investor Carl Icahn announced he was selling off his entire position in Apple Inc. (NASDAQ:AAPL), due to his mistrust in the way things are done in China. The thing is that Icahn suggested Apple was failing in China.

But when you consider that Apple generates about 25% of its revenues from China, second only to the U.S., you have to wonder what the heck Icahn is talking about.

Perhaps he is really concerned about the slowing sales of “iPhones” as a reason to blame his exit on China?

Then there is billionaire short seller Jim Chanos of Kynikos Associates who made a fortune shorting companies such as Enron.

Chanos has been bashing China since 2009, suggesting the country was ripe for an economic reckoning due to its real estate bubble.

Now, Chanos is correct to say the Chinese real estate bubble was vulnerable but the reality is that he has been bearish for years and if you followed his advice on China, you would be worse off. The SSE Composite Index was trading at around 2,700 in 2009 and ran up to a record 5,166.35 in May 2015, representing a gain of 91%. The SSE is back at around 3,000 now and Chanos continues to be bearish.

The point is that anyone can be proven right if they adhere to their conviction for years.

My assessment of China and the Chinese economy is that there are definitely some underlying structural issues that could inevitably backfire on Beijing. Given this, you need to be very careful toward China and its impact on the global economies. However, longer-term, the country will likely be a pillar of economic power.

Chanos, of course, probably wouldn’t agree with me.