Submitted by Henry Bonner, Sprott’s Thoughts:
Commodity prices have slumped as the Chinese stock market declines… Investors worry that commodity prices will stay low if China’s growth stalls.
Michael Kosowan, a broker at Sprott Private Wealth LP, believes that China’s economy is sound. The recent bubble may have resulted from central planners’ policies, not underlying problems with China’s economy.
China’s stock market took a mighty shudder for the second time this summer. Stock prices have crashed, sending a tidal wave of fear and panic across the globe.
Will China, the “engine” of the world’s great economic machine, come chugging to a halt?
Not likely — at least not in the long run.
With wages on the rise, rising educational attainment and literacy rates, and the decline in income inequality across the board, the sheer mass of its upwardly-mobile population makes China a powerhouse of human capital and personal consumption.
China has changed dramatically through the years. Most notably, it has delivered a massive middle class. China has seen unprecedented liberalization of its markets and personal and professional freedoms.
The Chinese government has actively sought ways to promote growth by encouraging its population to buy property. Last year, it encouraged households to invest in stocks.
These methods of stimulus helped create the bubble that is unwinding now. But overall we have witnessed healthy growth.
Housing and commodities, which Chinese investors use as collateral to gamble in stocks, were caught up in the market downtrend.
Gold was likely a primary form of collateral during the Chinese market boom. According to data from Hong Kong, China imported around 3,000 tons of gold over the last couple of years.
But the People’s Bank of China (PBOC) only reported around 1,600 tons of gold in its current holdings.1 The “missing” 1,400 tons could have been used as collateral for purchasing stocks.
So the central planners of the PBOC may have brought about a bubble by encouraging households to get into stocks and real-estate. But it’s not a reflection of a weakening underlying economy.
Those central planners still have many different easing instruments at their disposal, including debt issuance and currency de-valuation. In the weeks ahead, they are likely to experiment with cutting interest rates and further devaluing their currency in order to stabilize the stock market.
They may shuttle the bad debt off to warehouse-like institutions while they re-inflate their markets.
So if stocks fail to rebound, the PBOC stands ready and willing to re-inflate the bubble.
P.S.: To hear more from Michael on how the “Shanghai Surprise” might impact gold, watch his recent comments from the Sprott-Stansberry Symposium here: