China’s financial house-of-cards may start to tumble on 10/30/21 and how can investors profit?
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The combination of the probability of Evergrande’s missed debt payment and default on 10/30/21 and China’s lack of electricity to run the manufacturing plants can further put the squeeze on the world’s supply chain.
First Evergrande is the world’s largest real estate developer.
- They have either built or partially built hundreds of apartment buildings.
- They have 55 trillion in real estate, which is two times the size of the US real estate market and four times the size of China’s GDP.
- They have 300 million in debt owed to over 120 banks worldwide (not just two or three) and are expected to go into default on 10/30/21 after a 30-day grace period.
Will the PRC try to save Evergrande?
I suspect the PRC will try to save Evergrande, but what can they actually do to make a difference? Evergrande’s assets are four times China’s annual GDP.
- Not only will hundreds of thousands of Chinese workers lose their deposits on the property they purchased that will not be finished, but many of the contractors may not be paid, and they will go out of business.
- From a macroeconomic perspective, with the largest real estate firm “possibly” going into default, it will send credit tightening shock ways around the world for years.
- Companies you know and don’t know may have to take massive losses in the next year from the direct financial loss from Evergrande and the indirect ramifications of the situation.
- The Evergrande situation has the potential of spiraling out of control.
- I suspect is that the PRC is most concerned about is if the economy goes bad and natural (massive floods) and man-made disasters persist, then the PRC leadership has a risk of reaching a tipping point and losing their “mandate from heaven” to lead the people. This is a real thing in Chinese culture.
The PRC financial crisis hurts investors in several ways:
- Many of the worldwide banks and brokerage houses will lose if Evergrande defaults. Either directly or indirectly with write-off losses. The “house-of-cards” in the PRC real estate market is about to collapse to some degree. The Evergrande collapse and ramifications will suck lendable capital out of the world’s banking system, some combination of inflation, deflation, or stagflation. Different parts of the world may experience one of these three results.
- A percentage of the Chinese people will lose disposable income from the macroeconomic losses of investments and jobs from the downturn caused by the burst real estate bubble. That will hurt international companies that sell to the Chinese population by reducing demand for imports. Most companies that sell to Chinese consumers will be at risk of a microeconomic downturn.
- With many banks failing or tightening credit to Chinese manufactures, manufacturing and exports will be slowed to some degree. This will result in a further slowing of the world’s supply chain by an unknown about. However, many agree that the world’s economy will have to deal with the ramifications.
- If imports from the world slow, then it is not cost-effective for cargo ships to travel to China mostly empty. Thus further slowing the world supply chain issue.
Why are the Chinese Blackouts happening, and how do they affect your investments?
- Why is the Chinese Blackout happening?
- China is the third-largest producer of coal. However, China is the world’s biggest consumer of coal.
- There is a massive gap in the PRC production and needs.
- The primary uses of coal are making electricity and making steel. Steel production is one of the PRC’s most strategic exports.
- “CHINA has 2363, building 1171 total 3534,” according to AFP Factcheck (Sept 2019)
- Australia is the world’s biggest exporter of coal.
- For the past year, the PRC has banned imports from Australia due to a “COVID disagreement (that is all I want to say about that in this forum).
- However, due to the increasing blackouts, the PRC is now waiving the ban on Australian coal imports. The PRC has no choice.
- The PRC has many of the “rare-earth-metals” and massive amounts of manufacturing. They aggressively leverage these assets to their advantage. However, they don’t have enough coal. This uncommon copulation to Australia highlights a PRC vulnerability.
- How will the PRC Blackouts affect your investments?
- If the manufacturing plants cannot get reliable electricity, they will have to shut down. If the plant shuts down, then as an investor, if your portfolio has these companies in your mix, then you lose profit, or there will be a default, and you lose that portion of your portfolio.
- If the PRC can tell plants when and when they will not have electricity, the plants may or may not be able to produce a limited about of products to sell. Then, as an investor, you may lose less than running at full capacity.
- If foreign companies deem that they can no longer run their plants profitably, then they will leave China in the short term or long term.
- The PRC and US just announced this week that the US would sell natural gas to the PRC. Unfortunately, this may drive up domestic (US) natural gas prices this winter.
3. “AUKUS” Quad started in September of 2021 (US, India, Japan, and Australia)
With Australia becoming even more important to the PRC coal reserve needs, the US, Australia, India, and Japan started the AUKUS Quad agreement in September of 2021 to defend against the PRC and possible future invasions.
- The US currently has four aircraft carriers and their strike groups in the area. Hence, the US apparently perceives the threat to be authentic and creditable.
What should investors be considering?
Look for opportunities for companies with plants not in China to fill niche voids created due to Chinese manufacturing plants and factories that:
- Cannot get capital to produce to fill orders
- Cannot produce enough product to fill orders due to the lack of reliable electricity
- Cannot find cargo ships to transport the product to the west.
Here is what investors need to consider to find opportunities. There will be opportunities in most of the following cards in the house of card and their ramifications.
No financing due to no lending or no electricity
= no factories producing
= no output
= no sales
= no Chinese jobs
= lower imports into China = lower sales into China
= few cargo ships going to China
= few imports and few exports
= more supply chain issues worldwide
= even fewer sales worldwide
= fewer jobs worldwide
= global macroeconomic slowdown
= countries becoming desperate so military deterrents are needed.
It’s a vicious cycle that will lead to opportunities and macroeconomic shifts.
Place your bets. Good luck with picking your investments in these troubled waters.