The Motley Fool

China Crumbling?

Overnight “news” seems rarely to be good these days.

A bit came across through the night indicating the repo rate in China had spiked to 25% (according to Forbes).  In a nutshell, this is an indication of a banking meltdown going down right now in China.

This just a day after the country’s flash PMI report missed expectations and came through at a 9-month low.

Both points are bad for Canada’s resource sector.

An elevated, or record high, repo rate indicates a lack of trust within the Chinese banking sector.  A similar phenomenon that hit the U.S. banking system during the financial crisis of 2008/09.  If banks are nervous to lend to each other, it spells trouble for the underlying economy.  An economy that has driven the demand for commodities.  Canada’s commodities.

Taking a drubbing

Teck Resources (TSX:TCK.B) look out.  Same for you First Quantum (TSX:FM).  You are the producers of that which the Chinese economy has craved.  And gold companies, such as Barrick Gold (TSX:ABX) and Goldcorp (TSX:G), you too are in for some near-term pain given these China issues, as well as the Fed’s potential “tapering”.

In general, Chinese banking issues coupled with a change in the Fed’s game-plan does not bode well for those who have benefitted from this double-barreled ride.

With the spot price of gold currently down 3.7% to about $1,300/oz (up from its earlier lows) and copper down almost 2%, it’s likely to be an ugly day on the S&P/TSX Composite.  Oil is also down more than 2% thus far.

Given the exposure the Canadian market has to resources, those who’ve invested passively in a Canadian index fund aren’t as diversified as they may think.  To combat this issue, the Motley Fool has prepared a special FREE report5 Stocks to Replace Your Canadian Index Fund”.  Download this report at no charge, by simply clicking here now.

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Fool contributor Iain Butler is short $26 August 2013 put options on Teck Resources and $32 July 2013 put options on Goldcorp and owns shares of Barrick Gold and Teck Resources.  The Motley Fool has no position in any stocks mentioned at this time

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