“China is so far ahead of the world's excesses in prior crises. We are facing the largest macro imbalance in global history.”

–Kyle Bass, founder of hedge fund Hayman Capital Management

If you’re looking for a catalyst that could send China’s flagging economy into a tailspin, here’s one: The People’s Bank of China is pulling money out of the system in an effort to defend the yuan. But that could have ramifications for the country’s overheating debt markets too.

Let’s back up a bit.

The world’s smartest investors have been predicting China’s demise for some time now. In addition to multi-billion dollar hedge fund manager Kyle Bass, Jim Chanos, famed short seller who spotted fraud early at Enron and founder of Kynikos Associates, says China’s economy is on a "treadmill to hell."

It’s pretty clear why. Since 2007, China has added about $24 trillion-worth of debt. The true scope of the problem reveals itself when you consider, from 2000 to 2007, one of the greatest leverage run-ups in global history, the U.S. and Europe each added about $12 trillion in debt.

In other words, China’s economy, which is about one-quarter the size of the combined economies of the U.S. and Europe, just added as much debt, in the same amount of time, as those two economies did in the lead up to the biggest collapse in global history. And now, as you can see in the video above, the PBoC open market operations drained $595 billion in January alone to defend the yuan.

Not good.

WHat to Sell

Simple. Short Chinese stocks (FXI) as the economy slows.