The entire planet is closely watching the latest developments of the worst global conflict of the modern era. Meanwhile, in China, all hell is breaking loose as a new wave of virus cases continues to rise and trigger mass business shutdowns, financial markets have started crashing, and the economy is slumping at an alarming pace, sparking fears that the world may be headed to a horrifying global recession. China is currently facing the biggest virus outbreak since Wuhan. According to local reports, a fresh wave of infections sent cases soaring in the past few weeks, with 16 provinces reporting new vírus infections as megacities such as Beijing, Tianjin, Shanghai, and Chongqing seeing the biggest surge in over two years.
As a result, the Chinese government ordered businesses to halt all operations and shut down amid its zero-tolerance health crisis policy. According to Bloomberg, All businesses with the exception of those that supply food, fuel, and other necessities were ordered to close or work from home. Authorities have restricted access to Shanghai by suspending bus services, and also locked down the city of Shenzhen, home to over 17.5 million people and known as China’s Silicon Valley. Given that the port of Shenzhen is one of the busiest container ports in the world, and the entire city is in lockdown, we should start bracing for a new round of cascading chaos on global supply chains, which will come on top of the disruptions caused by the Ukraine crisis and the sanctions imposed on Russia.
At the same time, a spectacular stock market crash is plunging Chinese stocks to all-time lows, with the Hang Seng tech index collapsing 61% from its peak, and the Nasdaq Golden Dragon China Index of U.S.-traded stocks doing even worse, down 68%. Analysts say that within a couple of days the crash could surpass the 72% mark it previously hit during the 2008 global financial crisis. The Chinese bond market is also melting down. Cracks are also showing up in every corner of China’s government bond market, with yields on the 10-year sovereign note rising to 2.86%, the highest this year, as investors moved towards capital outflows. Credit stress is reaching new extremes in the country’s offshore and dollar-backed markets, where average junk yields jumped above 25%, which means that the primary market won’t function properly anytime soon.
China’s housing market crash is still taking place, as its biggest developers continue to see home sales cratering month after month amid a market that is effectively frozen. To make things worse, the country is also facing a credit crunch, with mortgage lending falling for the first time in 15 years. The situation is becoming so critical that foreign investors are dumping Chinese bonds in record amounts. Last month, they reduced their holdings of Chinese government bonds at the fastest pace ever, selling off a net 35 billion yuan of Chinese government bonds, marking the largest monthly cut on record according to data compiled by Bloomberg.
Even more worryingly, analysts are arguing that the only alternative to boost the Chinese economy and prevent it from falling into a roaring recession is more central bank liquidity. On the other hand, the U.S. is taking the exact opposite approach, with the Federal Reserve ready to hike interest rates to fight rampant inflation. But, as ZeroHedge analysts recently asked, “how long can US and China monetary policy diverge, with the former hiking and the latter cutting, before something terminally breaks?” On each side of the globe, conditions are still deteriorating very quickly, and without the support of the two largest economies on the planet, the world is going to collapse into chaos. Unfortunately, what we’ve seen so far is just the tip of the iceberg. We’ve reached a turning point and things will never be the same.
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