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Well, it looks as if the whole world is being downgraded these days. First we had the 'PIIGS' a common phrase now used in the media when discussing the EU and their most financially challenged nation-states, namely; Portugal, Ireland, Italy, Greece, and Spain. Then, the US got a shot across the bow from S & P with our downgrade here, meanwhile things are not looking so hot in China, as it works to come clean on its largest banks, their outstanding bad loans, and the reality of their strength. We've had what many call "fake stress tests" world-wide which do not seem to do anything more than calm markets for a few days. Reuters noted on September 8, 2009 that Fitch Ratings said it was warning that it would possibly downgrade China's credit rating sometime in the next couple of years, as it is drastically increasing the amount of its debt. Currently China is at AA- with Fitch. Moody's and S & P have not made similar moves. We all know why with S & P, but why has Moody's balked? Meanwhile on September 9, 2011 China Economic Review stated in an article titled; "Fitch Ratings Warns It May Downgrade China" that; "China would most likely increase its debt by just under $2.8 Trillion in the next year alone, and then that would be at 55% of GDP." Why is S & P not downgrading China right now? I believe it's simple, they want more business in that market, and who wouldn't with all the recent accounting corruption scandals, China needs credibility and the rating agencies can help them to lift the reputation of their good companies to investment grade. The US Justice Department seems to be going after S & P with vengeance and perhaps with a little notion of "pay-back time" (that's my guess) as they call S & P onto the carpet for their contribution to the 2008 financial collapse as they rated far too many Mortgage Backed Securities as Triple-A, that were a little less than junk. There is a ton of business to be had in China, especially as China needs a little outside credibility for its companies and banks due to all the corruption scandals and failures to submit SEC documentation as required by law once a company is public on the US exchanges. S & P or any other rating agency would be wise to chase after that business, but, is it more "pay to play" or solid ratings for a solid amount of business once again? Those are the questions I believe we ought to be pondering at this juncture, so I ask that you please consider all that. But, I'd also like to discuss another more pressing challenge now, some financial analysts are claiming that China is working to continually prop-up its economic growth to maintain a near 10% rate, and in doing so is actually causing the chances for a "soft economic landing" to be
completely out of the cards. Meaning, there will be hell to pay in the future, to the point that, it will all come crashing down. No not today, tomorrow, but when it goes, it will be a free-fall, much worse than the Shanghai index decline, over the last few years, and much faster too. There are outstanding bad loans, questionable offerings for bank bonds, and a whole series of inflated economic numbers, with claims of corruption behind the ever-present push to safe-face when things are getting worse not better. Can China maintain year-over-year growth at this continued rate of 10% or near that year-over-year? Most likely not, and there is a day of reckoning approaching, even if China pretends it will never come. Some analysts I've talked to say, "we will know when the rats start leaving the ship" - meaning when all those in the know start selling, everyone else would be wise to do so too. And when that all happens, well, the debate about currency manipulation will seem rather moot won't it? Should you be worried yet? Well, no we should be worried about the EU, and we need to get our own fiscal house in order in the US as well, but don't kid yourself China will have to face up to its growing pains and further hiding of the reality or putting in the proper controls to tame secure and stable markets, money flows, and economic realities will come back to haunt the Dragon, and at that point no one will be able to "save that fish from drowning" - as the old Chinese proverb goes. My advice is: "China's Economy is Not as It Seems - Investors Beware of Real Risks!" To better illustrate this point because it is not exactly news to most on Wall Street or serious investors - there was an interesting article recently in Bloomberg titled; "Roubini Says Soft Landing in China Is a Mission Impossible" by Kati Pohjanpalo published online on October 17, 2011. The article stated: "Over-investment "always" leads to a hard landing, and policy makers will "do anything possible" to keep growth in national output at rates above 8 percent and ensure a delicate political transition isn't hampered by an economic downturn, Roubini said. Growth in China's economy probably slowed to an annual 9.3% in Q3 from 9.5% in 3-months through June, according to a survey of analysts. Chinese officials will do what they can to "front-load" growth, pushing the risks associated with overheating out in the future." This basically says it all, and interestingly enough, this article popped up on my radar screen as I was preparing this piece, so that is to say; I am not the only one thinking here. So, please consider all this.
Lance Winslow has launched a new provocative series of eBooks on Future Concepts. Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank; http://www.worldthinktank.net
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