This document discusses the current economic situation in China and potential scenarios for its future growth. It begins with a market update and then focuses on issues in China, including rising corporate debt defaults, currency volatility, and the possibility of a property bubble. It then outlines three scenarios for China's economic growth: a soft landing, a hard landing with growth falling below 5%, and a recession with negative or 0% growth. The document discusses the potential macroeconomic consequences of each scenario, such as impacts on commodity prices, emerging markets like Australia that export to China, and even socio-political unrest within China itself. It concludes by discussing use cases for HiddenLevers' risk monitoring and scenario analysis tools.

1. Big Trouble in Little China
25 March 2014
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2. HiddenLevers War Room
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Product UpdatesScenario Updates

3. I. Market Update
II. Big Trouble in Little China
III. Scenarios
IV. HiddenLevers Use Cases
Big Trouble in Little China

4. HiddenLevers
MARKET UPDATE

5. Market Update
Euro Strength
Ukraine = Blip
Nikkei Spanked
Fed confirms time lag

6. Macro Snapshot
Consumer confidence climbing faster than retail sales – and NASDAQ is
climbing at a pace unseen since the original dot com bubble.

7. BIG TROUBLE IN LITTLE CHINA
HiddenLevers

8. Revisiting HL China Scenario – June 2013
sources: HiddenLevers, Reuters
trade deficitJapan analogue
Aussie Dollar Industrial metals
bearish consolidation
We got it right We got it wrong
-8
+20
…not that wrong
We covered many tells

9. Chinese Economy – Current Status
sources: HiddenLevers, Barclays, Economist, Bloomberg
Credit tightening
- interest rates going up 10%
- bank checks becoming more rigorous
Consumption
- growing 13% y-o-y
- government relying on this for growth
retail sales
Chinese New Year

10. Chinese Economy – Current Status
2014 GDP target = 7.5%
Analysts see 50/50 chance of below 7% growth.
sources: HiddenLevers, Economist, Reuters
5y performance
- 15% property prices
falling

11. Chinese Economy – Bubbles
sources: HiddenLevers, WSJ, ZeroHedge, Reuters
Corporate Debt Defaults
1976 – 2013 0
2014 2
only worse since 2011Chinese Premier to Private Sector
Expect more debt defaults

12. Chinese Economy – Bubbles
Yep
sources: WSJ, Reuters

13. Chinese Economy – Currency Volatility
source: HiddenLevers, WSJ, Reuters 1 , Reuters 2, Quartz
Yuan's importance as global currency
- should match China economic rise
- overtaken 22 others to be in 10 most used
- used often in trade settlement
- now tied to commodity derivatives
2014 = Yuan volatility skyrockets
- central bank bumbling
- disappointing economic data
- increased state spending
Consequences
- use as global payment currency down 8.5%
- FX hedges for exporters now compromised
World ditching Yuan
People's Bank of China
"We've got a lot of homework to do before the Yuan can
become an international currency,”
Big Changes in 2014
1. Trading band doubled
2. Speculator shake out

14. China vs India – Currencies + Equities
source: HiddenLevers
long term
Yuan up, Rupee down
Changing of the Guard?
Indian equities recovered with S+P despite drop in Rupee
Despite GDP Growth, Chinese equities down 60% since 2007

15. identity crisis
exporter  domestic consumption
don’t conflate the BRICS
rapid growth
good luck finding it in China
Big Trouble in Little China – Recap
downside watch copper,
upside watch consumption

16. HiddenLevers
CHINA SLOWDOWN – SCENARIOS

17. China Slowdown: Soft Landing (priced in)
source: Federal Reserve, HiddenLevers
China A-shares
down 60% from
highs. Is that
bottom?
Govt. goal (via
policy changes)
is in 7-8% range
100% priced-in
based on copper
price trend
2013 China GDP
over 7% despite
slowing housing,
exports
7% GDP Growth in China

18. China Slowdown: Hard Landing
Growth falls to
levels not seen
since 1990 –
below 5%
Govt. letting
Yuan fall to
avoid hard
landing
USD strengthens:
helps importers,
hits commodities
Falling property
prices
accelerate in big
cities
4-5% GDP Growth in China

19. China Slowdown: Recession
Global recession
likely, China = ½
of world growth
0% growth last
occurred in ‘76 –
before most in
China were born
Likely to spark
another bond
rally in US via
lower rates
Profound effects
on commodities
– like 2008
Negative Growth in China
Wall Street
analysts predict
Chinese QE if
recession looms
sources: HiddenLevers, Wall Street Journal

20. Scenario: China Slowdown
Priced In
Soft Landing
Bad
Hard Landing
Ugly
Recession
This is where we are
today, with China at
mid 7% GDP growth –
hence no further
impacts predicted.
A hard landing brings
commodities down
sharply but only a
limited correction in
US markets.
A Chinese recession
would drag the world
with it, leading to a
30% drop in equities
and a bond rally.

21. HiddenLevers
MACRO CONSEQUENCES

22. Goodbye Australia. Good luck to EM.
source: HiddenLevers, Financial Times
Australia has been the resource provider for the
Chinese growth story.
Resources provided
- Coal - Steel
- Iron ore - Gold
- Natural Gas - Precious stones
VULNERABILITY TO
CHINA SLOWDOWN
also
vulnerable
Indonesia
Brazil
Chile
Peru
-12
+1

23. Black Swan – China Socio-Political Crisis
China has been #1 in
economic growth for decades.
At what price?
- Press freedoms - Inequality
- Human rights - Labor rights
- Pollution - Global reputation
Black Swan
Political unrest in China as
a result of recession
Global fallout, not just regional
Not yet. HiddenLevers will monitor.
sources: Forbes, Reporters Without Borders, IHRRI
Global Press Freedom Rankings
Global Human Rights Rankings

24. HiddenLevers Use Cases
scenario
Bad News BRICS
War Room
BRICS
hitting bricks
War Room
China Slowdown
scenario
Commodities
Perfect Storm
scenario
China Slowdown
Big Trouble in Little China
Data Center
Copper
China GDP

25. • Risk Monitoring Alpha
- scenarios run against whole book
- automated stress testing run nightly
- alerts based on loss tolerance levels breached
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