It relates to the concept of a moist (hence, "water") vagina (hence, "chicken"). The Tawainese (Tawainese as a language is very similar to Chinese...but different)pronounciation phonetically is (basically): dj-we gay.
Look at that hot water chicken walking down the street!
2) A person who routinely participates in unwise or ill-planned actions, then feels jaded at the negative consequences. For concision, it is at the moment of realisation or epiphany of the mistake, just as the jaded feeling, embarrassment and regret begins to kick in, that the perpetrator is at his peak of waterchickeniness.
2) "You had to pull the string and spring the trap, didn't you... You water chicken."