US stocks fell marginally overnight. The Dow was down 0.2%, the S&P 500 around 0.15%, while the NASDAQ declined nearly 0.6%.
More interesting things are occurring in China. But that’s not really receiving much attention right now.
For example, China’s second-largest property developer, Evergrande, with US$300 billion in debts, has effectively defaulted on its debts.
According to Reuters:
‘Fitch Ratings cut the ratings of China Evergrande Group and two of its subsidiaries on Wednesday, the latest in a series of downgrades targeting the property firm over its struggles to restructure huge debts.
‘Regulators have warned that Evergrande’s 1.97 trillion yuan ($304.79 billion) of liabilities could spark broader risks to the country’s financial system if not stabilised.
‘Fitch said in a statement that it had downgraded the long-term foreign-currency issuer default ratings of Evergrande and subsidiaries Hengda Real Estate Group Co and Tianji Holding Ltd to CC from CCC+. Fitch defines a CC rating as indicating “very high levels” of credit risk.’
And according to Channel News Asia:
‘SHANGHAI: Property developer China Evergrande Group plans to suspend interest payments due on loans to two banks on Sept. 21, financial intelligence provider REDD reported on Wednesday, citing four sources briefed by bankers.
‘Evergrande has delayed payments to several trust firms, REDD reported, adding that the company may suspend all payments to its wealth management products starting Sept. 8.’
Sounds like a default to me.
But in a roaring bull market, news as significant as this is all but ignored.
You shouldn’t ignore it though.
This is potentially significant. Here’s why…
Xi Jinping is trying to curb speculation in the housing market. One of his slogans is ‘housing is for living, not for speculation’. While this is true, Xi is not acting out of any genuine concern for China’s citizens. Rather, he is trying to avoid future social unrest as more and more become locked out of the housing market.
So he’s trying to take some short-term pain now.
Part of his strategy is to curb leverage in property developers. Which is why the heavily-indebted Evergrande has been under the pump for a while now.
The problem for Xi is that things could spiral out of control. According to Bloomberg, property accounts for 28% of China’s GDP. The Wall Street Journal says land sales accounted for 30.8% of local government revenue in 2020.
China has been trying to ‘rebalance’ its economy for a decade now. It hasn’t been able to do so. I don’t know why now is going to be any different.
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The pain becomes too great. Then the authorities resort to their old playbook.
Still, China looks like it’s going to give it another crack. The WSJ reports:
‘The slowdown in construction is already becoming a major drag on the economy through lower demand for construction materials and retail goods like appliances. That could soon spill over to the banking system. At the Bank of China, the impaired loan ratio for real estate stood at 4.91% in June, compared with 0.41% a year earlier. So far, it looks manageable but it would become a much bigger problem if falling prices or a weaker job market start to hurt mortgage repayment. Real estate, construction and mortgages accounted for 41% of the BOC’s loans in mainland China, for example. The housing boom has fueled an enormous rise in household borrowing: It stood at 62% of gross domestic product as of June, compared with 44% five years earlier.’
Now you know why iron ore prices have started to plunge. They’ve got a long way to go…
I wonder if any of the idiots running this country have noticed what’s happening?
Is anyone really thinking about this?
This is the sort of ‘groupthink’ that my ultimate boss, Bill Bonner, talks about in his latest book. He even points the finger at our own newsletter industry:
‘Even the investment newsletter industry, of which we are part, has fallen for the go-go, buy-the-dip, prices-only-go-up bubble credo.’
To get your hands on Bill’s book, go here.
But to get back to our story…
While they spend all their time promoting COVID fear and compliance, have they noticed what’s going on in our largest market?
In the year to July, iron ore accounted for an astounding $180 billion in export receipts for Australia. Just two years prior, the figure was $75 billion.
Back in the much smaller post-credit crisis iron ore boom, the Reserve Bank was so concerned about the economy overheating that it raised interest rates from 3% in September 2009 to 4.75% by November 2010.
This time around, we’ve had the biggest positive hit to exports in our history (which boosts the terms of trade and national income) at the same time as record monetary and fiscal stimulus!
No wonder the property market is booming despite state tyrants doing their best to turn this country into a version of China.
No wonder the stock market is at record highs!
All this money has to go somewhere.
The only problem is that the tide has started to recede. The woes of China’s Evergrande are evidence of that. The plunging iron ore price is too.
This doesn’t mean the stock market is going to collapse. But it will put pressure on the Aussie dollar for starters. And if you think the RBA is going to normalise interest rates anytime soon, you’re dreaming.
Interest rates are going to remain near zero for many years to come.
The party is now getting into the wee hours…
Editor, The Rum Rebellion
PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.