Shares and bonds of Chinese real estate companies tanked yesterday.
Evergrande — more than US$300 billion in liabilities and 1,300 real estate projects in play — just missed a third batch of interest payments on its bonds.
This coincides with an important piece of personal research I’m releasing today.
It’s to do with the growing China crisis.
The second-order effects it could have on Australian investment portfolios in 2022.
And a counterstrategy which you can start employing now.
China’s embattled property sector faces an onslaught of downgrades between now and the end of the year.
But as you’ll see in my new report, the crisis goes much deeper than that.
A bit of quick background…
Late last year, Beijing implemented a ‘three red lines’ policy aimed at curbing leverage and risk in the property development sector.
Developers were to be assessed against three different financial criteria (called three red lines) to ensure they weren’t taking too much risk.
If the developers failed to meet any of these ‘three red lines’, regulators would place limits on the extent to which they could grow debt. Not meeting all three, for example, means no growth in debt is allowed.
This is the background story to the problems you’re now seeing in the property development space.
And this has really ramped up a level in the last few days…
Shares in Evergrande have been suspended in Hong King trading.
International bond sales by Chinese developers have all but halted.
There are urgent implications for Australia here.
The only question is whether investors will receive some sort of bailout or not.
In the past, ‘bailouts’ have been in the form of state-directed lending growth. That is, when debt goes bad, just create more of the stuff to paper over the cracks.
But that’s not going to happen this time around.
China has been doing that — to Australia’s benefit — for the past decade…and look where it’s got them.
Now President Xi is determined to follow a different path. One that puts his position of power ahead of the wealth of the nation.
This different path has a name — it’s called ‘common prosperity’. As Reuters explains:
‘President Xi Jinping has called for China to achieve “common prosperity”, seeking to narrow a yawning wealth gap that threatens the country’s economic ascent and the legitimacy of Communist Party rule.
‘“Common prosperity” as an idea is not new in China, but a sharp escalation in official rhetoric and a crackdown on excesses in industries including technology and private tuition has rattled investors in the world’s second-largest economy.
‘Xi, poised to begin a third term in 2022, is turning towards inequality after concluding a campaign to eliminate absolute poverty, pledging to make “solid progress” towards common prosperity by 2035 and “basically achieve” the goal by 2050.’
The message is clear:
China will not be our get out of jail free card in 2022
I’m convinced you’re going to see the bottom fall out of our iron ore sector by the end of the year.
As I’ve pointed out previously, it’s already started.
But it’s going to get much worse.
And then you’ll experience an even worse Australian economy in 2022 than you’ve seen so far, lockdowns or not.
‘Australia-China relations doomed to fail’, reports The New Daily.
When your main economic partner is also your main security threat…well, that poses some issues, doesn’t it?
A Lowy Institute poll just reported ‘unprecedented shifts’ in Australian public opinion. That we feel ‘unsafe’. That our optimism about our economy is at an historic low.
And there is a ‘precipitate decline’ in trust in China.
The tension you’ve seen between Australia and China since the COVID crisis began is just the start.
People don’t realise what this break-up is going to mean.
‘What we are witnessing now is the beginning of the end of the Chinese economy.’
That was David Robinson, CEO of RTS Private Wealth Management, quoted on 8 June 2020.
He’s one of the few analysts on the planet who sees what I see and is speaking on record about it.
You need to see what we see
Because if you’re trying to figure out how to steward your wealth for the final 20, 30, 40 years of your life, understanding the Australia-China divorce is, I believe, the most important thing you can do.
As Robinson points out, this end ‘is now being catalyzed by geopolitical tensions stemming from the coronavirus 2019 (COVID-19) pandemic.’
It will have a FAR more transformational impact on local investment markets than COVID.
And the implications for Australia — and your wealth — are even starker than what’s going on right now.
As Robinson concludes:
‘Investors who get their arms around the situation sooner rather than later and assess potential impacts on their portfolios will be better able to limit damage and position to benefit.’
Over the past 20 years, a few lone voices — me being one of the loudest — have warned of the dangers of having all our eggs in the China basket.
Of relying too heavily on resources, other trades, students, and free-spending tourists. That being a ‘remora’ to China’s great white shark would be our undoing.
What could possibly be wrong with hitching a ride with the next US?
Well, the true costs of our ‘special relationship’ or ‘strategic partnership’ are about to be felt.
As Alan Dupont writes:
‘The coronavirus crisis has exposed the fragility of just-in-time supply chains and the folly of relying on a single country for critical goods and infrastructure.
‘Some economic separation is unavoidable and necessary.’
And so, we come to what all this means for Australia.
And for YOU…
This China divorce will likely be the biggest hit our modern economy has ever experienced.
Yes…even bigger than the Great Depression.
That’s hard to wrap your head around.
Let my try and help you. Click here for the full story.
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.