IN THE EYE OF THE STORM
The past twelve weeks have brought a welcome calm to Asian markets following eight solid months of gut wrenching, heart breaking pain that saw volatility skyrocket, asset prices crumble and governments grasping at straws... desperately trying anything and everything just to stop the bleeding.
China is having its 2008... but they'll be lucky if it's only that bad.
More bad news appears to be on the horizon as markets are signaling that the current respite may soon be over. Like the passing eye of a storm, the end of the nightmare was just a dream.
UNCOMFORTABLE NEIGHBORS IN HISTORY AND UNFORTUNATE NEIGHBORS IN POLICY
To understand the scale and implications of China's problems, you don't have to go very far to find a cautionary tale that went unheeded. Japan's post-war growth had been dubbed an economic miracle. Benefiting from American interests during the Cold War and ample lending supply, the island nation rose from the ashes of World War II to become the second largest economy in the world by the 1980s.
But when the '90s rolled around, Japan's economy could no longer support the country's free wheeling spending and the mountains of bad debt that helped fuel the development went bust. Asset values crumbled at astonishing rates; equities and real estate fell by 60% and 70% respectively in the course of a single year. The 1990s ultimately became known as the 'lost decade'.
Sadly, Japan's 'lost decade' is now almost 26 years old as the country has never been fully able to escape the deflationary pressures that engulfed it a generation ago.
Similar to Japan's rise, China's conspicuous economic ascent has been fueled by easy access to credit. However, a loose regulatory environment and systemic corruption makes it difficult to grasp the total depth of the country's problem. China's debt to GDP is presently estimated to be an astounding 247%... but the shadow banking environment the nation operates in means the realistic figure is undoubtedly much higher. Worse yet, China is continuing to borrow at staggering rates. In January, China created $380 billion in new debt... that's a record. Much of the debt also carries an implicit government guarantee.
The country's total banking sector assets has breached $30 trillion as the country tries to borrow its way out of a slowing economy that has already fallen into a deflationary cycle. In the first quarter of 2016, China's GDP grew at 1.1%; that represents the slowest rate of growth since the data has been collected. China's nominal GDP is 7%, but its real GDP is only 5%, marking an annual rate of 2% deflation.
"ON A TREADMILL TO HELL"
Jim Chanos is a noted Wall Street bear who famously bet against Enron at the height of its power. His research on China revealed that the country has so over extended itself that it was building enough commercial office space for there to be a 5'x5' cubicle for every person in the world's most populous country. Combined with its mounting debt burden, he predicts that China is currently "on a treadmill to hell."
Others have taken notice too. Moody's and S&P have both warned of coming troubles if the country doesn't take immediate and drastic steps to address its debt burden. The Shanghai Composite has lost more than 40% from its most recent high in 2012.
Wynn Resorts generates more than 65% of its revenue from hotel and casino operations in Macau and is a good proxy for the health of market expectations for China. Here's a chart of the company's stock since 2003:
Having dropped more than 70% from its high just in 2014, the stock was showing signs of life with a recent bounce. However, technical indicators are pointing to more pain to come for the once mighty operation. Here's a look at the daily chart:
The red circle shows the stock breaking down below support levels which is a very bearish signal. Sadly, Wynn is not alone among Chinese stocks.
This is a chart of the FXI, a China large cap ETF.
Coming off of its recent lows, it also had a brief rebound. However, when we look at the daily chart, it too is beginning to break below its support levels.
China has tried on multiple occasions to prop up its faltering equity markets with huge cash infusions. The Chinese government has even taken to selling hoards of its stockpile of US Treasuries in order to fund the attempted bailout only to see markets fall farther.
http://www.wsj.com/articles/once-the-biggest-buyer-china-starts-dumping-u-s-government-debt-1444196065
It's hard to imagine China escaping a full blown meltdown. At this point, the bigger question seems to be, what happens to the rest of the world when China eventually self destructs?
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