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World Economic Jenga: Chinese Death-Spiral Panic Edition

The Technical Traders  ( Original )
APR 2, 2018

Who has time for international economic news these days? Keeping track of the domestic furor is a full-time job.

Today, a not-so-casual reminder that as goes China, so goes the world, should they be forced to dump US treasuries with little concern for price received.

We are going to explore the ongoing relationship between debt levels, shadow economic functions, global equity price levels and global economic activity all coincide at this very unique time to present a potentially massive and unprecedented event in human history – a massive economic collapse across dozens of nations and resulting in a potentially cataclysmic economic outcome.  We are certain you might be asking, “how could this happen again?”.

A downturn in the Chinese property market between 2015 till 2016 in combination with an equity price decline in excess of -15% to -20% and an outflow of capital from the Chinese economy resulted in a massive, $1 trillion, decrease in the Chinese capital reserves.  How could something like this result in a total of $1 trillion in reserves to be depleted?

The answer is that pressures on the economy at that time resulted in a number of general and corporate debt failures that, if left alone, would have pressured the entire Chinese financial/banking system into a possible crisis. Therefore, the Chinese had to make the problem go away.

They did this by diving into their reserves to wash away the debt issues while continuing to prop up their economies and banking institutes. This $1 trillion reserve decrease was the “patch” that was needed to make sure the economic collapse was averted.

It is our belief that any contraction in any single market, Chinese property, Chinese equities or Chinese debt could likely be contained as long as the contraction range is less than 15~25% from the most recent highest valuation points. Our range of 15~25% is just that, a range that should be considered extremely dangerous for the Chinese and Asian markets.  Should two or more of these market react in a similar manner, decreasing by 15~25% over an extended 12~24 month period, we believe the pressures of this type of move could be catastrophic for China and parts of Asia.

this type of valuation pressure would likely result in liquidations of foreign assets at near fire-sale prices. This type of market action is called a “death spiral” for a reason.