China has decided it is time to pull away the punch bowl for a little while.
There is a coordinated series of moves by China’s leadership to slow down the risk buildup posed by excess leverage.
The correction in both Chinese bonds and equities has thus far been met primarily with utter disinterest by advanced economy risk markets. Volatility levels are still crawling near historic lows across major asset classes and new all time highs are regularly being surpassed.
Still, if there is anything posing an out-sized share of global systemic risk it is China’s massive debt load.
Keep an eye on raw commodity prices in China as a leading proxy for inflationary/deflationary asset price impulses. Iron ore specifically has had difficulties stabilizing as the Q4 2016 run up is moving closer to being fully erased on the way back down.
My base case is that China is not yet ready to unravel and this is a healthy process of mild deleveraging. However, it won’t take many more risk off days in China before it begins to spill over into developed markets elsewhere. If this situation does not materialize with increased stabilization by the middle of next week, there will be a tradable risk off wave. Stay tuned.