Best Way To Short China?

Global risk markets have recently taken comfort in the Fed’s change of rhetoric along with Mario Draghi’s talk of pulling out the “monetary toolbox”. When combined with the Chinese government’s cutting of the reserve requirement ratio and other stimulative measures, it’s easy to see why sentiment shifted this month.

Yet the headlines out of China are getting scary. Monday morning Bloomberg is reporting on a special message from the Chinese leader.

China’s economy is not in good shape. Nor is dropping the reserve requirement ratio and cutting some tax rates going to turn it around. The truth of the matter is that we are now nine years from the Great Financial Crisis and China’s aggressive stimulus following that crisis has resulted in some rather uncomfortable misallocations of credit that need to be corrected. These fixes will not be easy and they will not be painless. China is not immune to laws of the business cycle even with their command economy.

I know that many risk-on bulls will point to this Chinese slowdown and reason, “their economy is quickly deteriorating so they are incented to make a deal with Trump.”

Yeah, there is no doubt that the Chinese hand is weaker than had their economy stayed firm, but to think that Xi will fold because of some short term pressure is naive. From Bloomberg:

Xi told a “seminar” of top provincial leaders and ministers in Beijing on Monday that the Communist Party needed greater efforts “to prevent and resolve major risks,” the official Xinhua News Agency said. He said areas of concern facing the leadership ranged from politics and ideology to the economy, environment and external situation.

“The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment,” Xi said, according to Xinhua. “The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.”

Xi is preparing his country for more difficult times ahead - not getting ready to make some landmark deal that gives the US everything Trump wants.

Now don’t get me wrong - there will most likely be a deal. It’s in both countries’ interest to stop the bleeding. Yet the deal will not be enough to stop the slide in the Chinese economy.

I don’t need to reproduce all the scary graphs of the Chinese debt buildup. Or the astounding unprecedented size of growth in the Chinese economy over the past two decades. Everyone knows the bear case as they have been hitting us over the head with it for the past decade.

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