Sarissa Resources Inc (SRSR)

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China’s economy is freezing up

So what happens next? There are four categories of outcome. The first is that Chinese leaders back off on the credit crunch and nothing happens, in which case they’ll probably just try the strategy again later. The second is that they press on and it works miraculously, cleaning out the financial system without causing too much pain. The third is that this spirals out of control, maybe because Beijing underestimated the risk or acted too late, potentially sending the global economy lurching once more. The fourth, and probably most likely, is that this works but is painful, averting catastrophe but slowing the Chinese economy after 20 years of miraculous growth.

China-watchers, who tend to vary widely in their assessments of the country’s economic health, seem to be converging on that fourth scenario, of a painful but necessary slowdown. Nomura, a Japanese investment bank, recently issued a note (via the Financial Times) addressing fears that China could face a financial collapse. Their less-than-comforting caveat: “This is a tricky issue, as the definition of ‘financial crisis’ can differ among investors.” The bank predict that China will not slip into a full-on crisis, citing Beijing’s control over the financial system and unwillingness to let it go under. But the Japanese bank warned: “Nonetheless, we expect a painful deleveraging process in the next few months. Some defaults will likely occur in the manufacturing industry and in non-bank financial institutions.”