The Valor Blog.
Investment News and Views, Direct from Our Team.

Crunch time for China

With China burning through foreign reserves at a rate of around $100 billion per month on top of their increase in $100 billion of foreign debt per month, there is now a time frame where China will likely run out of “net” foreign reserves.

Our estimate is for around March 2017 as the end of China’s debt experiment.

There are a few ways that China can play this conundrum. They can devalue their currency now, they can pretend that nothing is wrong and run into a currency crisis in around 15 months time or they can stop capital leaving China.

Either of these three methods is a terrible result for Australia. They all lead to a similar outcome. Chinese money will stop flowing to Australia leading to an enormous decrease in demand for our real estate and a significant reduction in supply for our dependence on overseas capital to fund our enormous mortgage debt. This is on top of the already obvious crash in mining and mining capital expenditure.

With a relatively specific due date for China’s problems to come to a head, we believe that the time to avoid Australian investments dependent on a 7% or so GDP growth in China has never been greater.

Australian property, Australian banks and Australian Miners and associated investments have all had a wonderful few decades. That golden period is now coming to an abrupt end some time between now and the middle of next year.

We fear that with a fast declining China, Australia’s dependence on overseas capital and increasing debt may put strain on our ability to borrow. Under these circumstances we may have a similar outcome to other commodity and capital dependent nations that have had to significantly increase interest rates into their decline. A number of borrowers would struggle with a half a percent increase in borrowing costs, let along a 3% or 4% increase in borrowing costs that a significant decline in China may cause.

To paraphrase Kerr Neilson, I believe that Australia’s economy is not too dissimilar to the emerging markets that have had significant currency and capital issues in the last year or two.

George Soros is very likely correct that China is almost certain to have a hard landing. There is still time to protect your hard earned savings.