How Will Your Stocks React if China Goes ‘Nuclear’ in 2013?

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Dear Reader,

Greg Canavan’s new ‘Fuse is Lit‘ film has certainly lit a fire inside the belly of many Aussies.

It’s had 27,447 views in just two weeks.

The Fuse is Lit‘ is a blistering take-down of the supposedly ‘safe hands’ that have been guiding Australia’s economy during the China boom years.

In it Greg shows the three areas where the China slowdown will start denting your savings, investments and retirement plans in 2013. And he gives you a plan for protecting yourself.

But it all rests on a central thesis: that the China boom has peaked. And that it’s not coming back. Some analysts contest this. Some are even optimistic that Aussie miners will see iron ore prices return to the near-$200 peak in 2011.

Whether or not the China boom really is over is the most important question you can ask about your wealth this decade.

So in the last couple of days before the Christmas break I sat down and put that question to Greg Canavan.

Enjoy…

Simon Munton: Greg, your ‘China’s Bust’ report was pretty prophetic. But what about the recent stories on how China’s economy is ‘recovering’ or has ‘bottomed’? Should you change your thesis to ‘China’s Just Had a Temporary Bust’?

Greg Canavan: No.

Simon: Can you elaborate?

Greg: Well sure, there’s no denying the economic data has improved from three months ago. But these sorts of post-bubble declines don’t happen in a straight line. In 2013 China’s growth rate will continue to slow. There may be mini-recoveries and the odd bits of positive data. But this won’t constitute ‘bottoming out’. What you’re really seeing is Beijing trying to manage the decline so it’s not too jarring.

Simon: So managed decline throughout the year?

Greg: Yes. Anyone who thinks the China boom will get anywhere near the heights of the last few years has been partaking in way too much eggnog over the Christmas break. China is now on the other side of its historic credit boom (which expanded most famously from 2009 to 2011). But due to the state-controlled nature of the banking system, credit growth is still running at dangerous levels. According to numbers by Fitch Ratings by 2013 China’s banking sector assets will have expanded by nearly US$14 trillion since 2008.

Simon: Meaning…

Greg: Meaning China basically replicated the entire US commercial banking sector in just five years. That kind of balance sheet expansion has consequences. In my view, when new credit exceeds one-third of GDP for four years running, you’re going to see some very nasty economic side-effects.

Simon: What kind of side effects?

Greg: This is where phase two of my China’s Bust thesis kicks in. China can do two things in 2013. It can ratchet up the old investment-led growth model anytime it wants. But this will only lead to greater problems down the track. I think China’s leadership understands this, and will take option two: managed decline. Chinese investors are already betting on the second option. In December 2012 the Shanghai stock exchange made new lows. This just goes to show how uneconomic and profitless much of China’s ‘boomtime’ growth has actually been. But it has showed some signs of life recently.

Simon: OK, so what are the implications here for Aussie investors in 2013?

Greg: Well there are three big ones. China’s rebalancing is a long drawn out affair. And it takes time for the effects to filter into different parts of the Australian economy. But keep in mind this rebalancing has been going on for at least 12 months now. So you’re going to see the effects of this rebalancing manifest in three specific areas of the Aussie economy in 2013. I demonstrate these three areas visually in a new video I recorded before the break. [If you haven’t watched it yet, go here.] But those are the negative consequences of the China slowdown, which I reckon you need to protect yourself from. In the closing weeks of the year a potential POSITIVE for Aussie investors has come to my attention…

Simon: What’s that?

Greg: The Chinese stock market is now down nearly 70% from its peak. That’s a massive fall, and you’d have to think there is some value in China’s stock market at these levels. If China’s market fell through its boom years, there’s no reason why it can’t rise during a more economically responsible ‘rebalancing’ phase. If China’s leaders begin to talk about profit being important, rather than just growth at all costs, it might be time to dip a toe in. There are ways you can do this WITHOUT having to buy Chinese stocks directly. I’ll be looking into those in 2013.

Simon: So what’s the big takeaway for Aussie investors as 2012 draws to a close?

Greg: The upshot for Aussie investors is that the stocks that have done very well in 2012 will be bad investments in 2013. I’m talking about the financial sector, which will feel the brunt from phase two of the China bust. If you want to know where I think the profit pockets will be in the Aussie market in the coming year, you should watch ‘The Fuse is Lit‘. You’ll learn about something I call ‘The Survival Circle‘.

Simon: What if China shocks everyone and goes ‘nuclear’, launching another big stimulus?

Greg: Well, in this game you’ve got to make calls. My call is that won’t happen. But I could be wrong. Even if that happens, the investments outlined in ‘The Survival Circle‘ should be sound ones to own. And if China puts even more air into its credit bubble there will be a great bunch of shorter term investment opportunities. But my baseline scenario is that China’s leaders know that reigniting the credit bubble will effectively seal their fate in a few years’ time. I don’t think they’d sacrifice their (and their Party’s) long term position for a few more years of rapid, investment-led, credit fuelled growth.

Simon: To find out how the China slowdown will bleed deeper into the Aussie economy in 2013, watch Greg’s new video presentation ‘The Fuse Is Lit‘.

Sincerely,

Simon Munton
Assistant Publisher
The Daily Reckoning

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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8 Comments on "How Will Your Stocks React if China Goes ‘Nuclear’ in 2013?"

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Ross
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The following link may be optimistic …. http://www.economist.com/blogs/graphicdetail/2012/12/daily-chart-18 However the debilitating price of western consumer/government debt and deep off balance sheet social liabilities creates the DR economic normalcy paradigm from which DR futurologists create their scenarios. The big issue is the US-Japan attack upon China in the currency markets and the Chinese response. The Yen is being taken down like in the 80’s against all currencies. In response, by targeting the Japanese brands rather than the direct trade, China has counter attacked by threatening Japanese investment and influence in SE Asia by means of its consumer boycott. And with the… Read more »
Jason
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If the Brookings Institute’s demographic research findings on China are correct, then the China boom is well and truly over.

GB
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50% increase in China’s budget deficit – smells like something is wrong!

http://www.bloomberg.com/news/2012-12-27/china-2013-budget-deficit-said-to-increase-50-to-192-billion.html

Ross
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http://www.bloomberg.com/news/2012-12-27/yuan-sets-tone-for-asia-as-japan-dethroned-by-china-currencies.html With their currencies all appreciating down to the actions of the Japanese and US beggar-thy-neighbours there is only one country that the others in East Asia can look to for support. The trade war then becomes delineated between the whole East Asia bloc and the self styled white men of Asia and their friends the US. For those that haven’t noticed our AUD is not with the white men of Asia team and it is appreciating against the Yen faster than most. This in turn allows our prime competitor in food product exports the US further penetration into the… Read more »
Ross
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This is something the Chinese should grapple with.

http://www.breakingviews.com/chinas-hukou-belongs-on-historys-scrapheap/21060033.article

The problem with corporatism is that it becomes harder to give up short of systemic collapse the longer it has run. At least they are yet to start exporting their elderly like the German corporatists.

Lachlan
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I am thinking for a fair time Ross that for the dominant players, a large war will be taken advantage of, as a conduit to a new level of centralisation of the state corporatist nature. And yet with so many dangerous players on the board who knows the outcome. Alliances and various forms of cooperation never last forever.
Then I was reading a US war veterans website somewhere the other day which pushed the idea that the US is preparing to go for Syria, Iran and Russia. But who really knows?

Lachlan
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Then there are nukes to consider.

Len Acheson
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Hi Greg,

A a currebt I have been very pleased with your in depth reporting.

Could I ask you to please comment on my underlying concern tnat soveriegn Governments could do as Rooservelt did in america and pass laws forcing Citizens to surrender their gold assets at a price set by the Government and to bar people from owning gold for a number of years. I am concerned as a holder of Physical precious metals that us physical holders we could be setting ourselves up for the biggest government hyst in history.

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