Our collective fortune is bound to theirs. Literally.
It’s been this way for a while. As the late Gough Whitlam said in 2002:
‘Hostility towards China distorted Australia’s international affairs for 20 years until 1972, but reconciliation with China 30 years ago had produced a quarter century of constructive bipartisan relations with our region and the world, unmatched in Australian history.’
Prescient timing from Gough.
When he said this in 2002, this three-decade foundation had set the scene for a monumental mining boom that would drive Australia’s prosperity through to the present day.
The rise of the Chinese century created mass wealth for those Australians lucky enough to ride the stock market and property tail winds that came with it.
And today, China remains far and away our most important trading partner:
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Now, more than ever, we’re linked to China’s fate.
But with an unfolding crisis in Hong Kong, a trade war with the US that seems to be getting worse and an economic backdrop of negative interest rates, could our luck soon be up?
Telling it like it is
Last Thursday, I was working from my home office.
The Bloomberg channel was on TV in the background as I listened to the fallout from the ‘inverted yield curve’ drama hitting the markets.
But a morning full of talking heads chattering on about bonds came nowhere near to matching the insight I got from an early afternoon email from one of my colleagues here at Money Morning.
You might be familiar with Matt Hibbard.
He’s written for Money Morning previously, and he’s also our in-house options trading expert. A rare commodity to have in such strange economic times.
Because as an options trader, he’s acutely aware of volatility.
You see, the price of options changes dramatically as share prices move up and down more sharply. More so than with shares even.
And the range of strategies an options trader can use makes share trading look like tiddly winks.
Which is why I find the way an options trader like Matt is looking at the situation, very interesting.
Anyway, here’s the email Matt sent around the editorial team last Thursday about how he sees the China opportunity right now.
When I read it, I just had to share it with you:
‘If you take the mainstream theme, China’s rise to top dog is a fait accomplishment.
‘That given its 1.4 billion population, huge military forces, massive growth (especially over the last couple of decades), that their rise to supremacy is only a matter of time.
‘Under the Rudd-Gillard-Rudd (RGR) years here in OZ, our government/public service even structured white papers around the inevitability of China’s dominance.
‘But I just can’t see how China can win this trade war.
‘I’m old enough (and grey enough!) to remember the Cold War, when the MSM then thought exactly the same about Russia, as they do today on China…that Russia too would dominate the world.
‘But here we are a generation later and the US still has the world’s biggest economy. And Russia?…about the size of Italy’s.
‘Like Trump, Xi Jinping has a lot to lose – perhaps more so.
‘October 1 marks China’s National Day to celebrate the 70th anniversary of the founding of the PRC.
‘While plenty has rightly been made about the claimed 500 million brought out of poverty, there are still hundreds of millions more who are still dirt poor.
‘The revolution has passed them by…what about me, they say.
‘Plus, the 100-200 million at the top of the tree have had a taste of capitalism, and they like it.
‘Chanel, YSL, travel, wine etc is now part of their life.
‘But having had a taste — and with the Chinese Communist Party (CCP) finally capping their flow of capital out of China in the last 24 months — now they get to worry like those in the West. What happens if they lose their wealth?
‘Or worse, what happens if the government comes and takes it all away? Life as they now know it will ebb away.
‘That leaves Xi Jingping caught in the middle — something his rivals in the CCP will seek to exploit.
‘Both the upper and lower class could turn on him if their economy starts to tilt. There is plenty of data to show that is already happening.
‘Maybe it leads to a huge recession in Australia?
‘But on the other hand, maybe Xi Jingping now has no other choice than to sniff the petrol one more time.
‘The biggest stimulus package could be well under way – something that could be a boon to our commodity producers.
‘Yep, love him or loathe him, the CCP have met their match in Trump.
‘What they are also learning, is that the US has been at this capitalism malarkey for a long time now.
‘The US can get it all wrong, but still come out the other side. And as we are seeing in HK, what the punters there (and in China) want — something that goes hand in hand with capitalism — is the right to speak their mind.’
Not just the destination
Whether you agree with Matt or not, I think it’s worth noting his thinking process more than anything else.
Options traders like Matt deal in probabilities, not certainties.
And they can make money even when the price doesn’t go the way they think it might by trading other things like time and volatility.
Which means they’re open to a lot more possibilities than the black and white opinions you get from many stock market traders.
As you can see Matt sees two extreme situations potentially arising from this situation.
Both outcomes will have sharp consequences for your investments here in Australia — up or down depending on what side of the trade you take.
You don’t need to agree with Matt’s assessment and I’ve got different views here too.
But it’s an important point for any investor or trader to remember. You need to take note of the pathway as much as the end point.
Even if you’re worried about the overall situation, you need to account for the fact, that markets might take a steep detour UP before they come down.
And vice versa applies. Markets might tank before they shoot higher.
One thing is clear…
You need to be watching China carefully right now and a have a good plan at the ready, no matter what happens.
Editor, Money Morning
PS: US–China trade tensions have actually created some incredible opportunities for Aussie investors. Click here to discover three unique plays on the US–China trade war.