China’s Economic Woes Position Traders For Gains

Is China headed for long-term inflation that could produce trading opportunities?

China has a dollar shortage and the country depends on strong foreign investment flows to manage debt. As the coronavirus issues continue to slow the Chinese economy, officials there must tap into dollar reserves against the debt.

China is facing two tough scenarios:

1. Defend the Yuan from devaluing by burning their dollars in the Forex market to buy it up. This is like selling a vital organ to pay for a home remodel, they will likely not do this.
2. Allow the Yuan to move by market forces which will begin the devaluation in earnest. In this scenario world markets would move sharply lower, at least initially. This option would allow China to preserve its precious dollar reserves but will increase the cost to import all commodities, of which they are a ravenous consumer of.

It appears China’s centrally-managed economy is beginning to play out the second scenario. This is setting up for big inflation affecting China.

Chinese health officials reported 409 new cases and 150 new deaths on Monday. These numbers raised total cases to 77,150 and deaths rose to 2,592. Chinese President Xi Jinping released official information that warned increasing coronavirus issues would negatively affect the Chinese economy.

The extended coronavirus issues are mounting — idled factories, quarantined cities, escalating numbers of sick and dead — along with other ongoing economic turmoil like increasing commodity and food costs and the political and social unrest in Hong Kong. All these stunted economic issues combined could set China up for a devalued Yuan and an inflation spike that might last months or years.

These negative economic pressures are significant for a country completely dependent on growth. As China’s growth slows, it’s debts become a harsh reality and all its debts are connected to the dollar.

While China’s economic woes might hit the stock market (although not initially because the market won’t like the Yuan falling quickly), this scenario will create trading opportunities in dollars, gold, silver, and bonds.

We Saw: the market racing down and selling all day — 

• AAPL lower, but holding near $300 against the market drop
• Eyeing BYND for a run into earnings
• Coronavirus fears hammering through the markets

We’re Watching: the sharp pullback in the market and what the charts show  — 

• How the market adjusts and what opportunities arise
• Searching for setups independent of the market’s action
• China’s economic issues – virus, dollar reserves, debt, inflation

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