Trading Forex on hope of Chinese Stability

In the days and months to come we believe that trading Forex on hope of Chinese stability will be unwise. Last week we posed a question. Will a burst Chinese real estate bubble destroy the Yuan ?

From news reports we see that the overheated Chinese real estate market continues to rise. This happens despite evidence of virtually empty malls, housing developments, and even newly built cities. In the eyes of many, far too much equity in China has been invested in real estate. The plain fact of the matter is that when the Chinese real estate bubble bursts it will take huge amounts of equity and credit with it. The question for Forex traders is this. Will a burst Chinese real estate bubble destroy the Yuan? The most profitable currency pair to trade is typically the one that is the most volatile. To the extent that one can trade the Yuan versus the USD or other majors, it may be time to short the Yuan or buy puts on the Yuan with US dollars in Forex options trading.

Our belief is that the Chinese currency will certainly not be destroyed but that China is heading for rough waters and currency traders should be wary when trading the Yuan. What we believe to be unwise is trading Forex in hope of Chinese stability. And here is why.

China Is Getting Older

The one couple one child policy in China has resulted in an aging population. However, China does not have a secure social safety net for the elderly. This is a bad situation that will require the Asian nation to spend significantly to support the elderly or risk widespread poverty and social unrest. If you are trading Forex on hope of Chinese stability remember that China is aging.

Wages Are Going Up In China

China has prospered because of its huge supply of cheap labor. Now there are fewer children growing up and more people who expect to be paid better. This puts China in the same fix that Japan was in two decades ago. If you are trading Forex on hope of Chinese stability beware of higher wages across the board in China leading to a less competitive economy.

Hidden Debt

Another comparison to Japan two decades ago is appropriate. China does not have a transparent banking system and there is evidence of far too many bad loans. As China tried to rein in credit they risk dragging down the economy and the Yuan with it. If you are trading Forex on hope of Chinese stability beware of too much bad debt.

Too Much Empty Real Estate

This brings us back to the beginning. Far too much investment in China has gone into non-productive sectors. Speculation on apartments in largely vacant new cities reminds us of traders bidding up dot com stocks far beyond what fundamentals could support. If you are trading Forex on hope of Chinese stability think of all those empty condos and malls.