- Money Morning Australia

How to Survive and Thrive from China’s Bust

Written on 12 July 2012 by Kris Sayce

How to Survive and Thrive from China’s Bust

If you’re a long-time Money Morning reader, you’ll remember that we’ve warned you about the Chinese economic bubble for at least the last three years.

But despite everything we’ve ever written on the China Bust, we’ve never really given you a concrete action plan or investment strategy to make money from it.

Well thankfully, one top analyst has come up with a plan. There’s nothing complicated about it.

You don’t need to be a millionaire investor, or buy risky derivatives products. In fact, you can get started on it today…

Most in the mainstream refused, and still refuse to accept that the Chinese economy will crash. As The Australian reported in October 2009:

‘Treasury chief Ken Henry has outlined a golden age for the Australian economy lasting to 2050 and beyond, as rapid population growth and Asian demand for resources bring a sustained surge of global investment.’

Today, both of those arguments look a bit ropey.

The latest Census shows the Aussie population is 300,000 fewer than analysts had predicted. And this morning, Bloomberg News reports:

‘China’s weakest growth in three years may pressure Premier Wen Jiabo to further ease the government’s crackdown on a property industry that accounts for more than a quarter of final demand.’

One of the biggest fallacies is that China somehow has the power to steer its economy where it sees fit…

The Mythical ‘Soft Landing’ Beast

That it just has to pull levers or press buttons and things will be fine…China’s economy will engineer a ‘soft landing’.

[By the way, a 'soft landing' is where an economy slowly decelerates with only minor economic fallout. Unfortunately, a soft landing is a mythical beast, with about as much chance of appearing as the Yeti.]

The bottom line is that governments – even command economy governments – can’t engineer a soft landing. A boom never turns into a sideways market, it always turns into a bust.

China’s economy is no different.

Legendary investor, Jim Chanos is another China bear. He recently said:

‘I have no doubt that if the Chinese government says that they’re forecasting 7.5% growth this year, no matter what is happening with the real economy they will print 7.5% or better, but I don’t necessarily believe that reflects reality.’

Not surprisingly, analysts surveyed by Bloomberg predict China’s GDP growth will be 7.7%. We’ll know for sure around lunchtime tomorrow.

Chanos is betting against China’s economy by short-selling Aussie and Brazilian iron ore stocks, and Chinese banks. As Chanos says about the banks:

‘As we did more and more work it became very apparent to us that the Chinese banks are the nexus through which all this credit-driven investment is flowing.’

Shorting Chinese banks is great for a big hedge fund. And shorting Aussie miners like BHP Billiton [ASX: BHP] and Fortescue Metals [ASX: FMG] is fine for traders – just ask Murray Dawes.

But not everyone wants to short sell. Because as Chanos says, stock buyers don’t always make the best short sellers because ‘the psychological behaviour is completely different.’

So how else can you profit from the China Bust? Well, Chanos and your editor aren’t the only China bears. Our old pal, Sound Money Sound Investments editor, Greg Canavan has banged on about the China Bust as long as we have…

A Bust Follows its Boom

In a revealing interview with publisher Dan Denning (available to all paying subscribers within the next couple of days), Greg told him:

‘It doesn’t really matter whether you’re a command economy or a purely capitalist economy. If you’ve had a massive misallocation of capital through a credit boom…you can move those debts off the banks and put them into another vehicle but…that represents an asset that is not generating an acceptable rate of return…. China’s savings have been invested in unproductive investments.’

That’s the forerunner to almost every bust. During a boom investors place capital all over the place, because they believe everything will make money.

It’s only when the credit boom ends that investors realise everything won’t make money, because the credit flow that supported the boom has ended.

So, what’s Greg’s solution?

Like Chanos, Greg says China’s banking system is at the centre of everything that has and will go wrong with China.

In a note to subscribers yesterday, Greg wrote:

‘Most of China’s assets are other countries’ debt…for example, US Treasuries. This is not a sound or stable asset base. But if China accumulates gold, it’s buying a pure asset. There is no liability, or counterparty, on the other side of the asset.

‘Say it amasses 5,000 tonnes of gold. At a price of $1,600 an ounce, that’s a value of $282 billion. Not much in the scheme of things. But at $5,000 an ounce, the value of the gold hoard jumps to $882 billion. At $10,000 gold, it becomes $1.76 trillion. At that level, gold would represent around 50% of China’s reserves.’

Greg talks more about his China Bust strategy here.

If you think the idea of China buying gold to shore up bank balance sheets is crazy, think again. Bloomberg News reports, ‘In May, imports by China from Hong Kong jumped sixfold to 75,635.7 kilograms (75.6 metric tons) from a year earlier…’

China has now overtaken India as the biggest importer of gold.

Survive and Prosper from a China Bust

But cornering the gold market is only half the story. It’s no good buying a bunch of gold while leaving your share portfolio as it is.

To really make the most of the coming China Bust, and to make sure your entire wealth and retirement savings are fully protected, you need to give your entire portfolio a service.

As we say, this is something you can put into action today, and it won’t cost you a fortune. To find out more, click here for Greg’s China Bust presentation and see how to get hold of his special report, Red Alert: What You Must Do to Survive and Prosper in the Coming China Crash.


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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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