What the Chinese Government Debt Downgrade Means for the U.S. Economy

Fitch Ratings, a credit rating agency, has downgraded Chinese yuan-denominated government debt from AA- to A+. (Source: Dow Jones Newswires, April 9, 2013.)

For foreign investors, it may not mean much, because yuan-based government debt is mainly traded domestically. But what this credit rating downgrade shows are troubled spots in the Chinese economy.

The agency stated: “Risks over China’s financial stability have grown.” (Source: Ibid.) Remember; when there is rapid credit expansion, bubbles usually follow.

According to Fitch, the amount of credit issued to the private sector in the Chinese economy was worth 135.7% of the country’s gross domestic product at the end of 2012. Since major banks in the Chinese economy are state-owned, the government bears the risks if things turn sour.

Unfortunately, Fitch is not the only one concerned about the Chinese economy’s future. Big-cap companies are also worried. The CFO of BHP Billiton Limited (NYSE/BHP), Graham Kerr, said regarding the Chinese economy: “Their moderate growth is around the 7 percent to 8 percent mark for the next couple of years… I don’t expect the double-digit growth rates to continue.” (Source: Creighton, A., “Sharp China slowdown is a big risk but we’re diversifying, says BHP CFO,” The Australian April 10, 2013.) Sure, seven to eight percent growth is great, but it’s the lowest pace at which the Chinese economy has grown in years.

With the slowdown in the Chinese economy going from an annual growth rate of 10%–11% to 7%–8%, the repercussions will be felt here at home.

We already have U.S.-based companies facing profit pressures from the eurozone due to an everlasting economic slowdown in the region. If the Chinese economy starts to slow, then American companies that operate there will see their profits squeezed as well.

If the U.S. economy was in a better state than it is today, maybe there would be a fighting chance we could weather the storm created by the slowdowns in the Chinese economy and the outright recessions/depressions in the eurozone. But as U.S. corporations deliver negative earnings growth for the first quarter of 2013, a global economic slowdown will be felt by U.S. companies and eventually the stock market.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in Profit Confidential, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

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