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All economic signals point toward a financial and economic disaster in China in the near future. How is that country's upcoming meltdown going to impact various international markets like stocks, automobiles, commodities, foreign currency, and more? The question is an especially pertinent one for people who hold yuan-backed investments of any kind. The thinking is that, as the communist nation's financial crisis deepens, its currency will underperform.
That might be an understatement considering the current situation. It appears that the centrally planned economy of the world's largest totalitarian nation has finally run its course. Since 1949, the one-party state has operated a controlled financial universe in which every relevant decision is made by a small group of unelected officials who never had that much confidence in capitalism, to begin with. Indeed, for the first decades of its existence, the People's Republic of China had no securities markets at all.
Far too many in the West bought into the communists' experiment with capitalism. Now, most individuals and corporations with a stake in China want out. How will the coming collapse of Xi Jinping's dictatorship affect investors in various markets all over the globe? Here are some of the details about how the situation could develop.
Worldwide Recession
There's already been a severe downturn in the international financial markets, and it borders on becoming a vast recession in the next months. But, if China's major corporations, government agencies, and institutions fail significantly, the crash has the potential to jumpstart a worldwide recession. China is such a massive part of the world's economy, mostly due to the billion-plus population of consumers.
But 2022 has not been a good time for the nation's banks, real estate developers, or the public. The COVID pandemic hit the Chinese hard, leading to the longest and strictest lockdowns and business shutdowns anywhere. Because millions of Chinese citizens purchase goods from the West, the pandemic alone was enough to cause ripples of financial weakness across a broad range of asset classes in the US, UK, Europe, Africa, India, and Russia.
Foreign Exchange
Currency markets are inherently interdependent, so if the yuan starts to drop by significant amounts, it's quite possible that the entire foreign exchange marketplace will be affected. Anyone who uses a forex profit calculator can figure out how even a small change in the yuan would impact investment in one of the currency pairs that it's a part of. Fortunately, forex traders can plan for severe devaluations in particular currencies.
That's one of the advantages of following current events and adjusting strategies based on known or probable future events. If Chinese markets fail across the board, look for the yuan's value to lose most of its purchasing power. While there are no guarantees about how a given currency will react to any specific event, the Chinese yuan is in a precarious position and could be the first or second domino to react to a national fiscal meltdown.
Yuan-Based Assets and Electric Cars
Logic dictates that yuan-based investments, like Chinese stocks, bonds, and currency, stand to lose big if the nation continues to lose its economic power. It's likely that many investors will begin to divest their portfolios of securities like Chinese real estate and corporate stocks. Electric car batteries are one of the staples of the nation's manufacturing sector, but recent problems with sales in the West could add to problems in that niche as well. Several US and European carmakers have recently backed off their plans to offer new all-electric models, which is bad news for Chinese makers of batteries and parts. Indeed, any asset tied to the yuan could face major problems in late 2022 and early 2023.
Taiwan-Based Companies Could Benefit
What's often lost in discussions about China's woes is the fact that nearby Taiwan, an independent nation with a democratic government, stands to benefit massively from the communist nation's woes. Why? Because hundreds of large international corporations that flee the centrally controlled government of the People's Republic can easily set up shop in Taipei, Taiwan's capital. The beauty of the maneuver is that Taiwan offers a viable, healthy economic system for long-term investing.
In fact, most such businesses already have functioning offices in Taiwan. What does that mean for investors based in Europe, the US, India, and elsewhere? When the People's Republic finally experiences the final stages of financial collapse, traders and investing enthusiasts with a stake in the faltering communist giant can readjust their portfolios to include Taiwan-based securities, currency, and other interests. There are no guarantees in international finance, but free economies always outperform those based on forced labor.
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