Should We Worry About China’s Economy?

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Everyone is so worried about China’s economy. True, it had a wicked stock market pullback — but China’s economy will not suffer, and quite to the contrary, it’s poised for much more growth.

Here’s why …

A. China’s economy is fine, growing at 7.0%. Latest figures for industrial production and retail sales show healthy growth as well, rising 6.1% and 10.1%, year over year, respectively in May.

Compare that with 1.3% and 1.4% for the U.S. economy!

Moreover …

B. China’s economy is likely to experience nothing but a temporary speed bump due to the recent market selloff.

Keep in mind …

— On a purchasing power basis, China’s economy is now larger than ours, at better than $19 trillion. Yet at the recent highs, China’s equity market capitalization was only $10 trillion.

Put another way, if China’s stock market capitalization were to roughly equal 1 to 1 as our market cap does with our GDP …

Then China’s stock markets would have to double from their recent highs, and from the recent crash low, gain more than 170 percent.

So is there long-term potential there? Absolutely.

In addition …

C. The Chinese are massively underinvested in stocks. The total number of stock brokerage accounts in China is less than 10% of the entire population.

Zhengzhou – home of 9.19 million.

Compare that to the U.S., where according to a 2014 Gallop survey, 52% of Americans say they personally, or jointly with a spouse, own stock outright or as part of a mutual fund or self-directed retirement account.

D. China’s national savings equals $21 trillion. That’s citizens’ savings on deposit in banks and financial firms. That’s more savings in a piggy bank than the entire Gross Domestic Product of our economy.

Compare that to total U.S. savings deposits at all U.S. depository institutions of $7.9 trillion. Put another way, Chinese save $2.6 for every $1 America saves.

So why all the doom and gloom on China? I’ll tell you why …

First, most analysts never even step foot in China, so they can’t possibly understand the economy. The Chinese are amongst the hardest working cultures on the planet, routinely working 18 hour days, six days a week.

Moreover, for most Chinese, failure is not an option. Entire families are deeply rooted in the family’s success, both as a family unit and also whatever enterprise they are involved in, whether that be farming, manufacturing, or what have you.

Second, the doom about China’s massive debt is totally misunderstood. Yes, there are big debts in the Chinese economy. But it is still a communist country with a largely closed economy where most industry is still state-owned.

That means it’s the state owing the state, the equivalent of two pockets on the same pair of pants. That is distinctly different from a fully open, fully capitalist economy.

Third, as I have said all along, stories of “ghost cities” in China is pure hogwash, tales told by inexperienced analysts, reporters, and tourists.

China builds for the future. The country builds in anticipation of migration. Case in point: A new metropolis in Zhengzhou, of Henan Province in east-central China.

When reporters from “60 Minutes” visited the city in 2013, they called it a “ghost city.”

Today, just over two years later, over 4.2 million Chinese reside in that “ghost city” … while Zhengzhou’s total population has mushroomed to 9.19 million.

That said, the recent shakeout in China’s stock markets is not yet over. Basis the Shanghai A shares index, I would look to establish long-term positions in top Chinese companies when the index falls back from its current 4,220 level to the 3,200 area.

Our Readers Speak

My columns Monday and Tuesday on gold and commodities continued to bring in a flood of reader comments. Let’s take a look at a few.

Reader David writes:

“With my half-vast understanding of economics and the theory of money and credit, I have come to the conclusion that probably the best possible monetary system would be gold-based.

Not a ‘gold-standard,’ but real true money being gold coins and bullion with fully-convertible money-substitutes (certificates) in a system of “Free-Banking” that permits laissez-faire FRB [Fractional Reserve Banking].

It seems to me that since the total stock of currency would be fixed at a known quantity, governments could not debase by inflation of the total stock of currency.

Now, why wouldn’t that work? And what’s your opinion of Bitcoin and the other “crypto-currencies? Do you think it is a viable concept?”

My response: It wouldn’t work for the simple reason that once you fix the price of something, or even the supply, you set up a deflationary cycle that would set the economy back decades.

As to crypto-currencies, they will keep popping up, but the governments of the world will merely learn from them, then squash them. They want to move to an electronic digital currency themselves, so they will not permit any competition. — Larry

Reader Alan writes:

“Hi Larry, your thoughts then are much like Martin Armstrong where we get a selloff maybe yet this Summer-Fall, then a rally to a top in 2016-2017 timeframe for the U.S. markets, while Europe sinks first and then Japan? All about money flow!”

My response: I know Martin well, we go back together to the early 1980s and I consider him my mentor on cycles. And yes, it’s all about capital flows and confidence, or the lack thereof. — Larry

Reader Robert writes:

“Hi Larry: Please elaborate, how are the Europeans transferring money to the U.S. or Americans transferring money to Asian investments?”

My response: Through investment. In equities, real estate, and more. — Larry

Reader Donald asks:

“You have not addressed oil lately. Your prediction on how low it will go, then when will it start back up and how far up will it go?”

My response: Oil will not bottom till it falls below $40 a barrel, possibly even below $30. It will then turn around to the upside, with a vengeance. Probably not till 2017. — Larry

Reader John writes:

“Does this recent China gold situation change your outlook for gold?”

My response: Not at all, to the contrary, it confirms gold is heading lower. — Larry

Reader Jerry points out:

“I’ve been following you for several years and have found your information to be fairly accurate. I too am very concerned about your Oct. 7 forecast, especially what we may face here in the U.S. According to all that I read, our country is in debt to the tune of more than 200 trillion dollars and climbing.

There are about 150 million people working here. If each one of us paid a one-time amount of $150, or 42 cents per day for 1 year, that would generate about 22.5 trillion dollars. A small price to pay and more than enough to pay the debt and give the U.S. a fresh start. Or is my math faulty?”

My response: The math is wrong. $150 times 150 million workers would be only $22.5 billion, not trillion. To pay it off in a year, each one of those 150 million U.S. workers would have to pay $1.33 million.

Spread it over, say 20 years, and you’re still talking over $66,000 a year. Spread it over 100 years and it would be $13,330 a year.

None of this includes the cost of interest expense. So as you can see, it’s patently unpayable, even if we were all super-patriotic. — Larry

Best wishes, as always …

Larry 

Other Developments of the Day

BulletYesterday at a packed Ohio State University student union, Ohio Gov. John Kasich announced he would be the 16th candidate to enter the presidential field. That’s a perfect number for a new season of The Celebrity Apprentice, one side of a chess set, or each personality on The Myers-Briggs Type Indicator, as The Guardian hilariously notes.

BulletThe Donald is back in the news again, leading his fellow GOP nominees by double digits according to the latest polls. But after his insanely personal attacks, including attacking Sen. John McCain’s POW status and, yesterday, giving out Lindsey Graham’s personal cell phone number, his campaign could be in serious trouble.

BulletIs the Apple Watch the failure that everyone thought it was? Apple said yesterday its third-quarter revenue had jumped 33%, and Tim Cook said the Watch was selling better in its initial sales period than both the iPhone and iPad had.

What are your thoughts? Does Kasich, with a strong record of bipartisanship and budget-balancing, stand a chance in the crowded GOP field? Do you own an Apple Watch? Let us know over at the website.

Larry Edelson, one of the world’s foremost experts on gold and precious metals, is the editor of Real Wealth Report and Supercycle Trader. Larry has called the ups and downs in the gold market time and again. As a result, he is often called upon by the media for his investing views. Larry has been featured on Bloomberg, Reuters and CNBC as well as The New York Times and New York Sun.

Comments 52

ian July 22, 2015

who could be, in there own mind be worried about the US,UK,Europe, Chinese,Asia markets and econimies...........I bloody am

Greta Snellman July 22, 2015

Larry...is there one paper stock that you would pick versus the hard silver or gold. Thank You. Greta.. PS: I have been following your Real Wealth Report for quite a while. Thank you so much, again. Greta..

John July 22, 2015

Larry- I'm a new Real Wealth subscriber and just thought I'd share that I really enjoy your interactive approach in the "Reader's Speak" section of the PM newsletter. Great job! John

Earl McHugh July 22, 2015

John Kasich is a fine, respectable governor or Ohio. He is a cut above some of the dregs now running like Rick Santorum, Governor Perry, Ted Cruz, Trump ( leagues above),Gov.Walker, laughable George Pataki, hapless Carly Fiorina, and equal to or better than Rand Paul and Jeb Bush. ( I forgot some of them ).

john July 22, 2015

Right on. I've had my eye on him for a long time. Glad he threw his hat in the ring.

Jim July 22, 2015

This is shaping up to be a very strange race. I agree Kasich is very personable, and capable. You cannot ignore the Trump phenomena though. His personality is not at issue. His willingness to fight back against the Progressives and emphasize issues is resonating with a lot people. We voted to fight back in 2010 and nothing happened. Four Million Republicans stayed home in 2012. We voted to fight back in 2014 and nothing has happened. Trump is doing what we wish other Republicans had been doing the last six years. The size of his rallies and the polls attest to this. If Conservatives don't take the fight to the Progressives they will lose again and we will have Hillary Clinton. No more Mr. Nice Guy! Jim

Elfriede A Bower July 23, 2015

We definitely need more conservatives to vote. Nietzche, a German philosopher said a long time ago "they will not fight while their bellies are full".- Not sure yet, if I would vote for Donald Trump but he resonates the thinking of a lot of Americans. He has the courage to call a spade a spade. Heaven forgive us if we end up with Hillary.

David Stegman July 22, 2015

Larry, I see the Gold and Silver markets falling handily at this moment. You state that the metals will soon have an uptick and then downward further with Gold under 1K, and Silver to follow. While I know you can't put a date on the above, can you perhaps elaborate what sort of time frame we are looking at before you suggest buying physicals with both hands? I want to be prepared to be in cash to take advantage of this moment, and it takes planning. Please advise

Fran Blazer July 22, 2015

Hi Larry, I listened to your 3 day interview and recommended it to family and friends My question is...as a 72 yr. old handicaped female living on social security and fighting bankrupcy...what do seniors or anyone in my situation do in the up and coming future. Please advise, thank you and best regards,

irene July 22, 2015

Be kind to your relatives so they will take care of you when economy collapses. Store up food and water for future.

Shar July 22, 2015

Larry, Enjoyed your presentation today. To follow up on this news release, are you waiting until 2017 to purchase any type of energy stock-minus the mining community? And what do you expect to hear from the IMF this Fall and what impact will that release have on the public sector living normal lives as opposed to the business community? Thanks, Shar

AUSTIN Stern July 22, 2015

Larry.....I had to miss your on-line presentation today. How can I get to either hear it or get the information in some other form? AUSTIN

David July 22, 2015

You say the US market will be the refuge for money escaping EU and Japan. Why not China instead, as refuge since you say it is such a powerhouse? *Also would still like your opinion on whether brokerage accounts (like Schwab) might be safer than banks. Thanks

Evan Neumann July 22, 2015

With all the uncertainty in the markets I have invested I I bonds, treasury money market and certificates of deposit. I would like to know whether I am at risk of government confiscation, and what I should be doing with this capital to ensure its safety?

Barbara Jennings July 22, 2015

1) Is it wise to own a home free and clear or should one keep a substantial mortgage in effect so the government won't steal it from them? 2) Why haven't you mentioned the "one world currency" in a long time? If the Euro countries, flight capital and Japan run to the US $$ for safety after they implode, where should we run to when the US follows suit? There won't be a US currency to run to.

john July 22, 2015

Get outta debt Lady!!! That's the best insurance there is.

john July 22, 2015

Thanks for your response about gold and China but will the " China effect " stop gold and silver from going lots higher?

Mr. Ariel F. Lovelace July 22, 2015

Dear Mr. Edelson, For the first time we disagree. The economic figures you quoted here are those take n directly from the Chinese state media, and based on the nation's industrially directed electrical output which has been falling for the past year and a half, China's economy is Actually only posting about 3.1% which is a break even figure. "I think they doth protest too much" ... and are too opaque an economy to take their word for it. Their stock market is currently stimulated much the same way the U.S. market was in 1929 and Ours is already currently stimulated to the tune of Four Trillion dollars in 2014. Additionally and finally the Chinese economy is based on 27% of it's population being employed. 73% of the Chinese population are living Outside Infrastructure .... meaning they exist on about $2-3.00 per day, do not have running water or electricity . Essentially a Bronze Age existence which is not uncommon in Asia and certainly a common one in China. I think a collapse of this market is inevitable which would ordinarily be without meaning except that it is the globes largest industrial power. The Collateral Damage will be a contagion at the very least, with total disregard to the inherent strengths of the Chinese economy due to the enormous debt they hold. And debt is the Empire Killer. I am sorry to disagree with you, as I really admire your work and value your advice. Sincerely, Mr. Ariel F. Lovelace

karey/canada July 22, 2015

hi Larry, you and i know Peter Schiff is a huge advocate of gold....and in connection to China why have they and India been stockpiling gold.......last year alone India picked up about 400 metric tons and China 650 metric tons.....are they doing this for fun or do they also realize that through QE's all the paper that has been printed is soon to be a doomsday device? Why would the Swiss after they dumped the Euro move their gold from London to home?? thks Karey............read your articles with vigor.

irene July 22, 2015

Edelson said we should buy SPY or DIA ETFs before Oct 7 IMF SDR ruling. Why buy these ETFS now as the stock market is declining and ETFs will be loosing money?

Larry July 22, 2015

Timing is everything. Wait for a pullback.

John G Galli July 22, 2015

Hi Larry: I am riding on a pile of LP's and MLP's and many others got caught in this oil "depression that began last year. Just to name a few, LINE and BBEP and quite a few others like these. You mentioned a possible bottom in oil near $40., or, gulp, even $30., with a recovery out to 2017. Whew, a lot to swallow. These companies carry large debt loads and pay, or did pay higher dividends, which in many cases have been cut or totally suspended. Can you comment in more depth your thoughts on what direction one could or should consider in this situation. Thanks and I enjoy your article and coverage.

John G Galli July 22, 2015

Hi Larry: I am riding on a pile of LP's and MLP's and many others got caught in this oil "depression that began last year. Just to name a few, LINE and BBEP and quite a few others like these. You mentioned a possible bottom in oil near $40., or, gulp, even $30., with a recovery out to 2017. Whew, a lot to swallow. These companies carry large debt loads and pay, or did pay higher dividends, which in many cases have been cut or totally suspended. Can you comment in more depth your thoughts on what direction one could or should consider in this situation. Thanks and I enjoy your articles and coverage.

Robert Calabro July 22, 2015

Dear Larry: I would like to make a point on China. China's one child per family policy will come back to haunt them. In a few years, millions of Chinese will retire. The Pyramid will inverse. There will be too few workers supporting millions of people. Even though the Chinese are great savers and hard workers, they have no safety net. this wrong headed policy by the Chinese will create social unrest. Historically, authoritarians and totalitarians hate social unrest because their power is threatened! On another note, the IMF will make the Chinese Yuan one of the currencies that back the IMF's currency, Special drawing rights. The Chinese do not have a deep and fluid Bond market therefore it will take a few years for it to compete to be a world currency. Regards, Robert Calabro.

Peter McNeall July 22, 2015

I have been watching China high speed trains on YouTube recently and am totally awed by what I have been seeing. I think China is on the right track.

Gary Steele July 22, 2015

22,500,000,000,000 debt 150,000,000 workers = 150,000 per worker

Peter Mcneall July 22, 2015

I have been watching China high speed trains on YouTube and am totally awed by what I am seeing. I think China is on the right track

Christopher Sullivan July 22, 2015

Larry, I just watched all three days of your convergence tour. You did not mention the IMF's decision on the yuan that will come in October. You had your reasons of doing so, but the acceleration of the decline of America, I believe, is pertinent to that precise event. Please do what you can. Thank you.

Larry July 22, 2015

There is NO way the yuan can dethrone the dollar at this time. Nor in October. The yuan is only about 4% of total international transactions. That will rise, but not overnight. It will take years to rival the dollar and before that even happens, the monetary system will come unglued, not because of the yuan, but because of global debt levels.

Agustin Batista July 25, 2015

the Yuan is only 4% of International transactions because it is not a reserve currency. As soon as it becomes one and joins the SDR it will surely become the the dollar's greatest rival, displacing all other reserve currencies.

stu July 22, 2015

Kasich would probably be the best of the choices. He's intelligent, experienced in mgmt., proven track record, people relate well to him. A tough road for recognition but a real person who could lead our nation. I like what I see so far.

bo July 22, 2015

Mr Edelson, Measuring the Chinese economy on purchasing power basis and then measuring the Chinese equity markets in actual market price dollars (nominal basis) and then overlapping it with the USA economy to deduce that the chinese market has a way to go up as it is not correlated 1 to 1 like the US is misleading or bad calculations. In this comparison the purchasing power is irrelevant as both of the measures are within China (the chinese equity markets and the chinese GDP). Thus the nominal GDP of China of 10.38 trillion dollars is also 1 to 1 correlated with the nominal value of their equity markets. "— On a purchasing power basis, China’s economy is now larger than ours, at better than $19 trillion. Yet at the recent highs, China’s equity market capitalization was only $10 trillion. Put another way, if China’s stock market capitalization were to roughly equal 1 to 1 as our market cap does with our GDP …"

Larry July 22, 2015

Technically, you are correct. But the exercise does show how much more potential China has. Long-term.

Gerald Hilsen July 22, 2015

Will all Americans have to worry about this IMF meeting in October of 2015? I have been watching alot of internet on this subject. How can everyone lose their currency, bonds, stock or other investments like they are saying or are they just blowing smoke and trying to scare all of us. If this does happen, what will any of us do????

Frank Johnson July 23, 2015

Is the date of Oct. 7 tied in with an IMF meeting on that date? How can you be sure that the four cycles you speak of converge on that exact date? You say that the last time that happened was in 1929. Was there an exact date in that year that corresponds to Oct. 7 in 2015? If so, could it have been predicted in advance similar to your prediction of Oct. 7 this time around?

Elfriede A Bower July 23, 2015

Larry, I am a long time subscriber to "Real Wealth". Every time something important comes up you offer a new type of subscription which is fine. But shouldn't wealth preservation & new ideas be part of the subscriptions of your old loyal customers or are we considered to ignorant for new ideas? I believe the old business ethics, taking good care of long time customers first, pays much better rewards for the future. By the way, all 3 of your Asia investments have "sell ratings" by Weiss or Zacks. A flash report with some suggestions on gold would be very welcome. I do appreciate your knowledge as a historian. Looking forward hearing from you. Sincerely, Elfriede A Bower

Agustin Batista July 25, 2015

HEAR, HEAR !!!

Bill July 23, 2015

Larry, In response to Jerry, you correctly pointed out that his math was wrong, that a payoff of $150 per person for the 150 million Americans working would generate "only" $22 billion not $22 trillion dollars. However, you then made an error in your calculation when you said it would take $1,330,000 per working American to retire our current national debt of about $18 trillion. I believe the correct number should be closer to $133,000, which has a very different "feel" to me. So if that amount of debt is roughly the order of magnitude of an average home mortgage, why can we not pay it off, assuming a 30 year time horizon? Why do we not have a 2-component national budget process, one part for "operations" and the second for "capital," which is really what the national debt is all about?

JimThorpe surfer July 23, 2015

Aloha Folks..I would agree that China's savings..will help in the Long Run.However 2things..First and Foremost..do you Really TRUST the Figures emanating from inside China 2) Production may still be increasing..though WHOM is going to Buy it..The EU..USofA ..et al and the BRICS economies are just ramping up so there it will take time..plus if you add in the Potential Chinese Citizens who would Buy..many are the ones who WILL have Financial Problems with Their Stock market gyrations..! I doubt I am going out on a Limb here...lol...Most Older SAVERS will NOT become big buyers especially in the "ASIAN" Culture..!! thanks for reading and aloha

Ken July 23, 2015

Hi Larry, Regarding a gold standard, I agree with you that fixing the price of gold would result in deflation, and I think the framers of our Constitution agreed also. But their ideal should have had a fix for that danger: "Congress shall have the power to.... coin money and to REGULATE THE VALUE THEREOF." If an (incorruptible) Congress were to do a good job of adjusting the money supply, i.e., regulating its value, (rather than allowing the Fed to do a bad job) wouldn't it be possible to control the supply such that we have neither deflation nor inflation?

stan July 23, 2015

I'm sorry but you can't believe the 7% growth stats put out by the Chinese govt just like you can't believe the stats put out by our govt. Also it's impossible to move 4.2M people into that empty city in 2yrs.

Grigpit July 23, 2015

Larry, could you please explain to me why the US debt is something real? Here is my line of thoughts: Debt is an obligation to pay something to someone else. If "we-the nation" is the debtor then who is the "someone else"? It turns out that "we" print the money and the "someone else" is again "we" (with some exceptions: some couple of trillions of debt were sold to the Chinese and others). Or in short we owe money to ourselves, because we didn't borrow the money from anyone else we just created it -printed it. Then why not (after some time) to simply forget our debt. Tell me please who will hold us accountable for such a master move? It's so simple - the debt issue is just a paper tiger.

Denise July 23, 2015

Enjoyed your Convergence talks. Can you talk about saving for retirement during the next 5 tough years?

Caine July 23, 2015

I'm a middle-of-the-roader, politically. I've been deeply discouraged by the obstructionism of the Republicans since 2009, and vainly hoping a credible Republican candidate would surface that I could support in this election cycle. Frankly, I had a lot of hope that John Kasich would be THAT candidate- he has so many good things going for him. But then I learned he was a managing director at Lehman Brothers for 7 years up to the time of their collapse. For me, that's a disqualifier.

guiseppe marco July 23, 2015

Kasich was in Washington for decades and look where we are. He had his chance. His speech sounded like a sermon with platitudes lacking specifics.

Keith July 23, 2015

China GDP is fake. The numbers lie.

Harold July 23, 2015

Larry: One analyst believes that the IMP will include the yuan in the basket of world currencies in October. The argument is that the Central banks will sell off USDs for yuan resulting in a plunge value of the USD. It seems to me that such an event would offset the effects of any flight of money from Europe into the U.S. Your comment would be most interesting.

Stephen July 24, 2015

Ray Kurzweil, noted futurist, inventor, and head of research at Google, has been predicting for quite some years the advances in solar power, with it producing energy at the rate of doubling every two years. If he is correct, these advances should begin to impact the prices of oil, natural gas, and coal sometime in the not-so-distant future. Shouldn't futures in these markets begin to anticipate the advances in solar technologies and prices? What are your opinions of this?

Joe S July 24, 2015

larry when you get back investing in china would you play be FXI .

Gloria Hutchinson July 25, 2015

During my "week Investment trip" to China in 2007, I learned that the entire business community was saving gold from leaving the Country, so I invested in gold when I returned and it raised from 800 to 1300 when I sold it. I discovered that there are no cows in China, so I wondered how our Burger Companies would survive there. When Nixon visited there decades before, The Chinese knew that he liked cheese, and sent a Currier to Mongolia to get it for him. It took a week to go each way, but Nixon was presented with his cheese and no one was the wiser. Everyone in China uses two wheeled vehicles for personal transport. The purchase of automobiles requires about $20,000 to acquire an ownership license and is passed down through the generations or by company succession. At that time (2007) personal car ownership was practically non-existent. Each day we were given water by the Hotels where we stopped for the night going from Beijing down the East Coast to Shanghai to HongKong and two stock exchanges in China. No one drank the tap water ever. Fortunately we did not yet have air pollution to content with. When leaving China, we had to surrender all water bottles and any water we had before entering the Airport. The culture in China is one of Learning and to accomplish anything in one's life was the result of Learning. Going to a Child's Museum was the unexpected highlight of my trip. It had in its center a Rube Goldberg contraption four stoics high of a dropping ball that took two full minutes to descend much to the delight of the Children who also enjoyed colorful toy experiments to play which demonstrated various scientific views of life. What a change from the Sales driven advertisements here in America bombarding our children.

Ron Stothers July 26, 2015

You have just told the rest of us how to be successful work like the Chinese. Perhaps if each of us had two jobs. Perhaps one less stressful than the other, one totally different than the other. Our lives may very well become more rewarding,satisfying and healthy. We would watch less TV and be happier. Our economy would grow, our standard of living would be rise and a future would be set for our children.

Robert July 27, 2015

Can the govt. touch an ira comppsed of gold coins and gold bullion,not mining companies, but physical gold, itself?