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Why the financial system affects dry bulk shipping companies

Xun Yao Chen

Will China's financial crisis crash the dry bulk shipping party? (Part 1 of 7)

The financial system

The financial system is an integral part of the economy. Without a well-functioning financial system, we wouldn’t be able to consume and save like we do today. The U.S. financial crisis whose kick started a global economic crisis in 2007–2008 feels distant to many investors who are now piling into stocks. We might not remember the exact feeling, seeing stocks drop 10%-plus day by day, but we must keep in mind that what goes around comes around.

It happens everywhere

The United States isn’t the only country with a history of financial crises. European countries were recently mired in a crisis. Just a decade ago, Asian countries also experienced their own financial crisis—which perhaps was one reason why the tech bubble got so hot as people pulled out of investments in overseas markets and threw the returned capital into domestic equities.

A double-edged sword

But debt isn’t all doom and gloom, because it allows people to enjoy future wealth today. When people are taking on debt, economic demand and spending go up—generally a positive for the stock market. The problem occurs when an economy takes on too much debt, uses it for unproductive activities, and in the process increases the chance of default. When things go bad, spending falls, bad loans accumulate, people rush to pull money out, and the financial system breaks.

The connection to dry bulk shippers

The financial system is the engine that keeps the economy rising. But when the financial system collapses, economic activity falls. It’s imperative for dry bulk investors to understand China’s monetary policies, because dry bulk shipments largely depend on China’s economic growth. The following few indicators in this regularly updated series are some of the important ones that show a different side of activity in China and its implications for the Guggenheim Shipping ETF (SEA) and dry bulk shippers.

Dry bulk shippers include DryShips Inc. (DRYS), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), Baltic Trading Ltd. (BALT), Knightsbridge Tankers Ltd. (VLCCF), Diana Shipping Inc. (DSX), and Star Bulk Carriers Corp. (SBLK).

Continue to Part 2

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