{"id":51851,"date":"2023-08-23T03:02:21","date_gmt":"2023-08-23T07:02:21","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/china-could-be-a-ticking-time-bomb\/"},"modified":"2023-08-23T03:02:24","modified_gmt":"2023-08-23T07:02:24","slug":"china-could-be-a-ticking-time-bomb","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=51851","title":{"rendered":"China Could Be A Ticking Time Bomb"},"content":{"rendered":"
\n

<\/picture>
<\/figcaption><\/figure>\n<\/p>\n

Thesis Summary<\/h2>\n

Last week, I wrote about the potential for a huge 1987-style Black Monday sell-off, which the now incredibly popular 0DTE options could ignite.<\/p>\n

Since then, China has monopolized news headlines following the bankruptcy of Evergrande (<\/span>OTC:EGRNF). Indeed, it looks like China is in big trouble.<\/span><\/p>\n

Could this be yet another trillion-dollar black swan? Could China spark a global credit collapse? What can China do to stop this?<\/p>\n

There’s no doubt that the Chinese government and the PBoC are in a hard spot, trying to re-ignite the economy and defend the yuan. With that said, I feel like China could be a good contrarian bet in the short term here.<\/p>\n

Long-term investors might want to ask themselves. If China loses, who wins?<\/p>\n

China Has Some Serious Problems<\/h2>\n

Once again, China is in the news, as the property giant Evergrande has <\/span>filed for bankruptcy. This is probably not the first time you’ve heard of Evergrande, as fears of its collapse already surfaced back in 2021.<\/span><\/p>\n

However, this time, it looks a lot worse for two main reasons. For one thing, the Chinese economy is in pretty bad shape, and we are already starting to see signs of contagion within China. Zhongzhi, a Chinese shadow bank worth $137 billion, is also preparing for restructuring.<\/p>\n

The shadow banking industry is worth over $3 trillion, and that’s nothing when we compare it to the size of China’s real estate market, which is arguably the largest asset class in the world:<\/p>\n

\n

\"Value<\/picture>
\n

Value of Chinese Property market (Goldman Sachs )<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

It would not be an understatement to say that this could be one of the largest credit events in history.<\/p>\n

The pain in Chinese credit markets can also be clearly seen in the spread between property and non-property yields.<\/p>\n

\n

\"China<\/picture>
\n

China credit spreads (X (Twitter))<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

And these developments come at a pretty bad time for the country. Youth unemployment is at record highs, exports are falling off a cliff, and the population is declining.<\/p>\n

Can China Turn Things Around?<\/h2>\n

But surely, there’s something that China can do to fight this collapse? If this was the Federal Reserve, we would have probably already seen a swift and over-the-top response. But the PBoC is not the Fed, and it does not enjoy the benefits of dealing in the world’s reserve currency.<\/p>\n

This is the second reason why this time collapse might be inevitable:<\/p>\n

\n

\"Yuan\"<\/span><\/picture>
\n

Yuan (TradingView)<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The PBoC would probably like to stimulate the economy through aggressive monetary stimulus and rate cuts, but it probably also wants to defend the exchange rate at this point.<\/p>\n

The USDCNH exchange is approaching its 2022 high. Over the last year, the yuan has been rapidly depreciating, and this is not something China wants to see as it tries to establish itself as a monetary alternative to the US dollar.<\/p>\n

Furthermore, the country is also wearing off, pulling too hard on the fiscal and monetary levers, as doing so is precisely the reason why they face this housing (construction bubble today).<\/p>\n

This can be at least partly attributed to the aggressive response that China carried out following the 08 financial crisis.<\/p>\n

\n

Back in 2008, Chinese leaders rolled out a four trillion yuan ($586 billion) fiscal package to minimize the impact of the global financial crisis. It was seen as a success and helped boost Beijing’s domestic and international political standing as well as China’s economic growth, which soared to more than 9% in the second half of 2009.<\/p>\n

But the measures, which were focused on government-led infrastructure projects, also led to an unprecedented credit expansion and massive increase in local government debt, from which the economy is still struggling to recover. In 2012, Beijing said it wouldn’t be doing it again. The costs were just too high.<\/p>\n

Source: CNN Business<\/p>\n<\/blockquote>\n

China doesn’t want to resort to another huge round of stimulus, but it is slowly starting to signal that it is ready to support markets and the economy.<\/p>\n

The PBoC surprised markets by cutting rates in its last meeting:<\/p>\n

\n

\"China<\/picture>
\n

China Rate cuts (PBoC)<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Beyond that, we can also expect the National Development and Reform Commission (NDRC) to support the economy in other ways:<\/p>\n

\n

The measures announced by the NDRC on Monday cover a wide range of industries, including automobile, real estate, electronic products, and services industry\u2026<\/p>\n

They include increasing consumer loans to encourage car purchases, building more EV charging facilities, building more affordable homes for young people, supporting the consumption of wearable devices and smart products, and encouraging local governments to hold food, music, and sports festivals to attract tourists.<\/p>\n<\/blockquote>\n

Source: CNN Business<\/p>\n

Interestingly, there’s also been some speculation that the Chines government could be directly buying ETFs.<\/p>\n

China is limited on the monetary policy side, as it needs to defend its exchange rate. However, there are a couple of other options for the country here:<\/p>\n