CLIF DROKE 12/20/2012 (http://www.financialsense.

com/contributors/clif-droke/coming-china-crisisinterview-bert-dohmen) The big X-factor for the stock market in the coming months will clearly be hina. !uring periods when any of the ma"or weekly or yearly cycles are bottoming and the market is vulnerable to a correction# there$s always a news headline event that serves as a scapegoat for the market$s weakness. %ast year the scapegoat was &reece and the euro'one debt crisis. This year the void will be filled by hina$s slowing economy.

Underscoring the growing worries over China # Tom (rlik wrote in the )arch *+ issue of theWall Street Journal: Markets fear a slowdown in Chinas factories. They should also be concerned about possible government instability. ,e went on to e-plain that
hina$s real estate investment showed no growth from a year earlier and that e-port growth slipped to +../ from 01.*/ in the fourth 2uarter of *300. )oreover# a 2uarterly survey by hina$s central bank showed demand for loans at its lowest since the financial crisis of *33.. The ,45 purchasing managers$ inde- registered a reading of 1..0 for )arch# below the 63 mark that historically signals contraction and suggesting that hina$s manufacturing sector is shrinking.

Chinas economic slowdown was preceded by a ma or peak in its stock market in !uly "##$ after the post "##% global market rally . hina$s 4hanghai omposite 7nde- was the first of the ma"or global markets to peak following the post-credit crisis rebound# and it has been in a general slump ever since (see chart below). harles !ow# of !ow Theory fame# asserted
that the stock market typically discounts economic recessions by several months in advance. 7n hina$s case its e2uity market was discounting an economic slowdown by a couple of years in advance. This was due no doubt to the country$s stratospheric growth of recent years and the residual economic momentum which kept its &!8 forging ahead long after its stock market peaked. 9et the

downward trend visible in the Chinese stock market since "##$ was sending an undeniable signal that leaner times were and are ahead for the countrys economy. 7llustrative of the stock market$s leading indication over the
economy# ever since hina$s e2uity market peaked in *33:# hina$s &!8 growth rate has peaked and its economy has slowed. This has also had a measurable impact on the global market for commodities. (il demand has fallen even though a number of observers continue to attribute high oil prices to hina$s voracious appetite for fuel. The 7nternational ;nergy <gency (7;<) recently noted that oil demand has declined for the first time the global economic crisis of *33.. The 7;< blamed mild weather# high prices and the likelihood of a global recession for the drop in demand# but a more likely culprit is hina. &old and silver demand has also been in decline since last year. The sluggish demand is blamed by many traders on fears that hina$s formerly voracious demand for metals may be waning# especially if its economy continues to slow. hina$s slowing economy can be attributed to the decision of hina$s central bank to tighten li2uidity. < series of interest rate hikes designed to cooling off the runaway property market has had the unintended (or intended=) effect of tamping down growth across the board. hina has also increased fuel prices for the second time in "ust over a month. <ccording to >euters# benchmark diesel now costs about ?0.** per liter and gasoline ?0.0@ A about *3 percent higher than average B.4. prices# and 63 percent higher than pump prices in hina three years ago. This is an e-tension of the tight monetary policy. <nd while hina$s annual growth rate is still an impressive @.6 percent# it represents a slowdown from recent years. The fact that hina$s growth rate is still high has lulled investors into a false sense of security. That still-strong growth rate will be slowed even more significantly in the ne-t year by the heavy-handedness of hina$s political leadership. harles !ow$s postulate that an e-tended stock market decline sooner or later translates to an economic downturn is instructive in hina$s case. The bear market for hina stocks is at least three years old (four if you count the pre-credit crisis peak). The longer it persists# the more negative its implications for hina$s industrial economy.

Chinas cheerleaders made a critical lapse in udgment when they assumed the countrys runaway prosperity of the last "# years signaled the birth of

the worlds ne&t super power. The clear lesson of history is that no nation ruled by Communist leadership can ever hope to become a complete super power on the global stage. <n economy capable of bouncing back from adversity in short order re2uires a fle-ible free market
financial system able to respond to the rigors and comple-ities of the reticulated global marketplace. < ommunist superstructure is by its very nature rigid and unresponsive to subtle free market signals and can$t help but eventually be overwhelmed by the economic super cycles when they converge to the downside.

7n many ways this is hina$s first real test as a ma"or economic power. The country will soon discover what an industrial recession/depression is like. ,ow it responds to this critical test could well determine its economic and political future. 7f the ommunist 8arty proves woefully inept in responding to the challenges of a deep economic recession# we may well witness a revolutionary uprising of the hinese people demanding a more democratic and less authoritarian government. Throwing off the shackles of ommunism would indeed liberate hina$s economy# allowing it to reach heights previously deemed impossible under 5ei"ing$s dictatorship. The clearing of the financial and economic landscape after the 0*3-year cycle bottom in late *301 will be# for many countries# the last chance for reform. hina now finds itself on the outer periphery of a spinning vorte- of global proportions A a whirlpool which will wreak havoc on the debt of developed countries when it reaches its clima- in *301. The countries that will be in the best position to assume leadership in the new 0*3-year cycle will be those which have the lowest debt burdens relative to their productive capacity# along with strong debt containment capabilities. hina en"oys a distinct advantage in terms of its sovereign debt. 7ts autocratic government is a disadvantage# however# and could prove to be fatal to its long-term economic designs. ,ow hina responds to its coming crisis will shed light on its post-*301 future. The coming hina super crisis could prove to be the touchstone issue of the final 0*3-year down cycle between now and late *301. 7t would certainty take most economists and asset managers by surprise. hina is considered by many observers to be relatively immune to the vagaries of Cestern style deflationary cycles. 7magine their collective shock when they discover that the >ed !ragon isn$t immune from the economic super cycles that have plagued the Cest for decades. hina has done an e-cellent "ob of copying elements of Cestern capitalism into its state-controlled economy. 5ut as 7an 5remmer recently observed in >euters.com# DBltimately state capitalism is "ust a pale imitation of the real thing.E 'old (T) The i*hares 'old Trust (7<B)# our pro-y for gold# has been under selling pressure in the weeks since its Feb. *: sell-off and made a slightly lower low on Thursday# )ar. **. <s we predicted in our commentaries of recent weeks# 7<B has now tested the critical +3-week (G33-day) moving average shown in the chart below. <s previously stated# the +3-week moving average has turned back declines in the past# including most recently Hovember-!ecember *300 correction. 7<B needs to show us that it has bottomed# which it can do in the ne-t few days by re-establishing support above the technically significant +3-week )<# which intersects at appro-imately the 06.+3 level in the daily chart. < short-term e2uity cycle is bottoming right now# which should take some of the pressure off gold. 5efore we have confirmation that gold has made a bottom# however# we need to see it confirm this bottom in relation to its dominant immediate-term 06-day moving average per the rules of our trading discipline. Ce remain in a cash position until this bottom is confirmed.