“Land sales slowed sharply in China last year, according to a series of industry reports that highlight the deepening woes of debt-laden local governments that depend on land auctions as a crucial revenue source.” – Financial Times
The news isn’t getting any better is it?
In a moment we’ll show you why it’s still not too late to make a buck from China’s economic collapse using BHP. First, a refresher…
Remember that much of China’s regional building program is paid for by selling bonds against land. It works something like this…
Chinese local governments sell bonds using land as collateral. The local government then uses the proceeds to build such things as sports stadiums, skyscrapers and swimming pools.
The bond buyers are assured they’ll get their money back because… well, property always goes up… and heck, look at the magnificent buildings… in the middle of nowhere!
Revenue that is generated from sporting events, leasing office space and swimming entry fees is used to pay the coupon on the bond. Eventually the bond is repaid when it reaches maturity (after say, 10 years).
Either the bonds are paid from the massive revenues made from these buildings (not likely). Or, as in all speculative Ponzi schemes, from the sale of other over-priced land.
In other words, China’s economy is built on two sets of foundations. Both equally as weak as the other: Western consumer credit (which we wrote about in yesterday’s Money Morning article The Sun Starts to Set on China’s Economy), and land speculation.
Both of which are certain to go bust.
So, how can you capitalise on this?
You could do a lot worse than keeping your eye on BHP Billiton.
Click here to enlarge
News agency AAP reported last August, “Around 30 per cent of BHP’s business comes from China in the form of iron ore exports, a relationship which largely shapes Australia’s reliance on the Asian economic superpower.”
Dow Jones Newswires reported on Wednesday:
“Chinese copper smelters have settled copper processing fees from global miner BHP Billiton Ltd (BHP) at a lower level in 2012 compared with 2011…
“The processing fees, known as TC/RCs, were settled at $60.50 a metric ton for treatment charges and 6.05 cents a pound for refining charges, well below 2011 first-half TC/RCs of $72-$77/ton and 7.2-7.7 cents/lb as well as second-half TC/RCs of $90/ton and 9 cents/lb…”
Material companies that rely on Chinese trade turn down when the Chinese economy slows.
BHP has more than 30% of its business at risk on China. For the past four years, however, BHP shares have behaved as though 100% of its business is with China.
Simply because China’s influence on BHP reaches further than just the company’s direct trade…
It also relies on the trade between Rio Tinto and China… Brazil’s Cia Vale do Rio Doce and China… And Fortescue Metal and China.
Put another way, even though only 30% of BHP’s business is with China, the only thing that matters to investors is… that’s right, China.
But even though we’re convinced the Chinese economy will eventually collapse into a painful recession, we’re not saying it will happen right away. And it won’t mean BHP (or RIO and Fortescue) shares will fall in a straight line.
Experience tells us the market has a habit of grasping at straws and false hope. That’s where you’ll get short-term rallies even though the longer-term trend is down.
Yesterday, BHP shares closed down 1.1% at $35.82. Is that a significant level? We’re not sure.
Slipstream Trader, Murray Dawes loves shorting BHP.
But he got out of a short-term BHP trade a couple of days ago. The last we heard from him (he’s watching the market from Sydney this week, while your editor is keeping an eye on things from Gippsland) he’s waiting for the next chance to short BHP.
Our take on the chart is there’s a chance traders could push the share up by a dollar or so before it gets dumped again. BHP shares are volatile, as is most of the market, so anything could happen.
The Sun Starts to Set on the Chinese Economy
2012-01-05 – Kris Sayce
The Chinese Economy and Australia: the Last of the Bubbles
2011-12-20 – Kris Sayce
The Other Side of Short Selling
2011-09-14 – Aaron Tyrrell
Why China’s Quicksand Economy Will Sink Australia
2011-11-24 – Kris Sayce
From the Archives…
2011: What We Got Right. What We Got Wrong.
2012-01-01 – Kris Sayce
Speculators v Spectators
2011-12-31 – Kris Sayce
The Great Australian Housing Shortage?
2011-12-22 – Kris Sayce
For editorial enquiries and feedback, email email@example.com
Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...