Liquidity, inflation, stock market gambling…China is ready to crash

Former Morgan Stanley (NYSE: MS) star Andy Xie says he thinks China is ready to crash.

"I think it's going to be bust very soon," Reuters reports Xie saying, laying the blame on the usual suspects: excess liquidity, rising inflation and rich valuations.

"People will be surprised. When the end comes, it's going to be pretty bad,"
Xie said.

Well, we won't be surprised. What surprises us is that the crash is taking so long to get here.

How DO you say 'bubble' in Mandarin?

Last night, we dreamt that the Dow was crashing. We woke up and wondered if it had been a dream...or a prophecy. We'll have to wait and see, but for now we keep our Crash Alert flag flying here at the Daily Reckoning headquarters, just in case. Dreams foretold Caesar's death on the Ides of March...maybe they'll foretell the Dow's demise.

Meanwhile, more evidence that China is readying as a crash cometh - in a letter from a Chinese reader, sent to colleague Porter Stansberry:

"All the people I know in China now gamble in stock. On one of China's TV stations yesterday, was the report that out of the 16 million people in Shanghai, close to 11 million now put money into the stock market. Almost everyone - you name it: taxi driver, security guard, mini fruit-shop owner, high school student, retiree. But in the long run, a lot of this will end in tears, no matter how quickly China's GDP grows. There is simply no decent research to educate Chinese people on how investing is different from speculating out there."

What do we care what happens in China?

Well, the Chinese central bank has a cash hoard of U.S. dollars mounting up towards $1 trillion. What will happen to all this money when the country goes into an economic crisis? If the Chinese chose to, they could send the U.S. dollar into free-fall, force American interest rates up sharply...and drive the U.S. economy into a slump. More than 80% of the U.S. budget deficit is financed by foreigners...and much of it by the Chinese.

Or maybe China will use its money to buy weapons. That would be interesting, wouldn't it?

Or, they could try to corner the market on the key strategic supplies of modern economies - such as oil, uranium and granite countertops.

Yes, dear reader, it is free cash flow that makes the world go 'round...and China's got it - because China makes things that people want to buy.

Bill Bonner
The Daily Reckoning Australia

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