How concerned should the market really be on China right now?
When the sleeping giant awakens, things don't tend to end well. I reckon that may be the case with China right now as the market appears to be rather sanguine about all the risks involved amid the shift in direction by local authorities.
Evergrande is the name that stands out as the poster boy for all of those worries, as the company is being made an example of the broader crackdown that China is trying to push forward with across most, if not all, major industries right now.
Don't get me wrong. China has the tools at its disposal to easily bail out Evergrande and prop up the economy. It just isn't choosing to do so at this moment for one reason or another, be it debt worries or just plain power consolidation.
The government's latest feud with Alibaba also shows how much they are trying to rein in control as the digital yuan rollout faces a big challenge amid more established payment networks such as Alipay and WeChat Pay.
As much as the PBOC maintains that a digital yuan isn't a competitor to those apps, it is clear that when Chinese authorities get around to rolling something out that they are not just going to let it be overshadowed or have it play second fiddle if you will.
That may also be in part why China is cracking down more heavily across other sectors of the economy as well. But if I had to guess, I'd say that the slowing recovery in China (economic data has been terrible lately) gives local authorities a reason to just double down on regulatory measures so as to start fresh again when the economy gets back up.
In a way, one can say that it could be akin to a 'healthy reset'.
Evergrande is the more immediate risk factor considering that it is the country's most indebted company and we're already seeing some reverberations:
Other property stocks and bank stocks are being hit this week with Evergrande bond trading halted completely again today and will only be resumed tomorrow.
If China is prepared to let this keep going, things could turn out really bad for global markets and I don't think that is a risk that the market is quite prepared for.
For the most part, everyone is still focused on the pandemic recovery and how that is impacting policies at the Fed, ECB, and other major central banks.
But when you ignore the sleeping giant, you'd better best have a plan for dealing with it when it wakes up eventually.