Market forecasts are not linear. Multiple new factors will arise to influence the outcome. 

  1. China’s $1.1t portfolio is only 5% of the total US debt (US$22T). However it’s the power of the marginal sellers/buyers that moves the market. In this case, there are no new buyers for China’s selling… except the US itself which is already mired in debt.
  1. PetroYuan vs PetroDollar influence. The petrodollar has been a key factor in making the US$ the hegemonic currency over the past 40 years. China has moved recently to build its own petroyuan as a counter (for the group of Belt and Road nations that it deals with). More analysis to come on the future energy war.
  1. US counteraction. The US needs the world to keep faith in the US$ and US debt. It will counter aggressively, and the worrisome aspect is that it may not be just in the financial arena. The Fed will buy to support the market and cajole US banks (via reserve holding rules) to do the same. However, the US is mired in debt (although it is rich in hard assets (and illiquid) worldwide) so is generating more debt to buy its debt.
  1. EU reactions. The EU is the third equal force in this arena. Both the US and China will need EU markets more following the US/China decoupling. The EU may be a key beneficiary, peace maker and king maker if it plays its cards well. However unlike the China (1-party state), and the US (2 party state) the EU is a multi-party state so getting a concerted EU action will be slow.
  1. Lessons from the 2008 GFC. The majority of pundits and polls did not forecast it. 11 years ago, the world was in chaos and staring into the abyss of the next Great Depression… it just shows how fragile the financial markets really are.
  1. Chinese hard assets in dollars. Chinese corporates had been on a buying wave in the past decade or so but most of the overleveraged firms have been selling out of US and global hard assets (in US$) to pay down debt.
  1. China own financial black swan/grey rhino risks. This is be big unknown –see my past newsletters eg P2P lending, China’s overleveraged, overbuilt and overpriced real estate, corruption risk and hidden local government debt, assets created on borrowed money with little return on investments.
  1. China’s social stability –see my past newsletters. With 35 million single males with little hope of finding a wife, China cannot afford to have mass unemployment. More analysis to come