Tags: jaocb | wolinsky | China | Closer | Collapse | Greece

China Is Much Closer to Collapse Than Greece

By Jacob Wolinsky   |   Thursday, 07 Jul 2011 06:51 AM

The entire financial world has been focused on the horrible fiscal situation in Greece.

A year ago, the world was worried about Greece, but then moved on to other more exciting issues while the market just seemed to forget that the debt problems of Greece still existed.

However, there is a much bigger problem, 20 times the size of Greece, which people are only starting to pay attention to: China. China has a GDP of close to $6 trillion, as opposed to Greece, which has a GDP of only $300 billion.

Many will argue that there are many differences between Greece and China. Greece has a huge debt load, while China has a low amount of debt and can use its $3 trillion of foreign currencies to offset any slowdown. Additionally, China has a massive amount of hidden debt, which Moody’s noted earlier this week.

According to Victor Shih, a professor of political economy at Northwestern University who has studied China’s municipal debt, there is close to $3 trillion of municipal debt hidden from government audits.

However, while there are differences, China’s debt situation is much worse than the media purports it to be. In addition, the foreign currency reserves are worthless if the economy starts to decline more rapidly.

Russia had almost $1 trillion of foreign currency reserves, but it experienced a depression as the global economy collapsed in late 2008.

Furthermore, as we see in the United States, spending trillions of dollars doesn’t always help. We spent trillions of dollars through the Fed, TARP, all these other programs, the stimulus package — and we are currently at 9.1 percent unemployment three years later.

Taking it a step further, the China stimulus package, which the government launched in 2008, caused the bubble. The Chinese government provided close to $600 billion, mostly in loans to various types of construction projects.

China now is facing inflation pressures, and is raising rates, which will cause the bubble to burst even quicker.

What will be the repercussions for a possible economic crisis in China?

It will be far worse than Greece. Civil unrest could break out. I spoke to a very successful hedge-fund manager, who left China to escape the communists. He sees a nearly identical economic situation today in China (people begging for food on the streets, government corruption, etc.), that existed in 1949, when the communists took over.

If there is a revolution, expect massive inflation in the United States. Supplies of Chinese goods to companies like Walmart will slow down or stop, leading to massive spikes in the price of many items.

Additionally, as China holds 10 percent of U.S. debt, the market might be scared about further purchases, and that will drive up borrowing costs in the U.S.

Investors should be focusing on a possible collapse of China instead of Greece.

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