China Debt Rises

It seems that China’s stock market problems are far from over. Recently, the governor of the People’s Bank of China (PBOC) issued a warning that corporate debt is far too high for Chinese businesses, and that when compared to the country’s gross domestic product, the proportion of debt has become unsafe. Ideally, the goal would be to convert that debt and the lending that has caused it to be more focused on direct capital.

In addition to this, Moody’s has also voiced concerns, giving a warning earlier in March that they might be downgrading China’s sovereign rating. This was said because of the rising rate of debt in China—most specifically the stock market—and because of the decreasing amounts of foreign exchange reserves that the country is seeing. This latter is surprising because of the fact that the International Monetary Fund recently announced that the yuan would be added to the reserve basket, essentially making it a major currency along with the U.S. dollar, the euro, the Japanese yen, and the British pound sterling, and this should have drastically increased liquidity for the yuan. So far, the exact opposite has been happening, again pointing to signs of problems in Beijing.

Everyone has seen what the Chinese markets have done (in part) to the worldwide economy. The U.S. stock market is just now sitting at high points for the 2016 calendar year. This took a lot of intervention on behalf of the Federal Reserve to accomplish. Chinese stocks are now sitting at a decent level, but if the lending issue becomes more prominent, it’s only a matter of time before something like what happened in the U.S. in 2008 during that lending crisis occurs in China. The impact would be devastating on a global level.

The first step to take on this information is to look at how this would affect your trading. If you have trades open that would be negatively impacted by a Chinese lending crisis, you should be looking at ways to exit those positions at the first sign of trouble. Second, as you create new trades, you should be looking for either positions that would be helped by an issue like this, or that you expect to expire beforehand. Binary options are a great tool here because of their short shelf life. This leads to point number three. You want to find a way to create income during a decline in global markets. Again, binary options have the short shelf life before expiration that allows you to create profits in tiny amounts of time. They also allow you to profit in declining markets with put options. Unlike most other types of trading, there are no extra fees or risk when you open up this equivalent of a short position, which helps you preserve your cash in order to make more cash. When you take compounding interest into account, this can be the difference of tens of thousands of dollars each year in profits.

Right now, you should only be looking at these things hypothetically. There is still plenty of time for Chinese businesses (and other markets, too) to reverse the amounts of debt they are taking on and convert it to profits. All companies take on debt, but only in extreme cases does it cause problems. Mostly, you should just be observing and looking for escape routes if this does collapse. Also, keep in mind that the ways to avoid problems with your portfolio may change as the situation changes. This is a fluid issue, and finding an answer right now might not necessarily help you a few months from now. It’s something that you will need to keep tweaking as you go.