[Editor's note: Sovereign Man's Chief Investment Strategist Tim Staermose is filling in today while Simon spends a few days with designers and engineers at the farm in Chile. More on those developments soon.]
For a few decades now, the Communist Party in China has had an implicit social and political contract with the Chinese populous for decades, which goes something like:
“We will deliver economic growth and improvements in your material living standards. You will meekly do as you are told, refrain from dissent, work hard, save a huge percentage of your money, and ignore obvious corruption.”
While nearly everyone in China has benefited to some degree under this current “system,” the wheels are definitely starting to come off. Official GDP numbers are now slowing, real estate prices are falling, and inflation is quickening.
Now, I’ve made no secret that I’m decidedly bearish on China’s medium-term prospects. After my trip there back in June to conduct some good old-fashioned “boots on the ground” research, I wrote extensively about the massive overbuilding of apartments, office blocks, and all manner of infrastructure on an almost unimaginable scale.
Put simply, every year since 2005, more than 50% of China’s GDP has consisted of construction-related spending. The law of diminishing marginal returns says this simply cannot continue.
It represents a misallocation of the household sector’s hard-earned savings on a colossal scale, and I believe it will end badly. Not a day goes by that there aren’t riots and protests somewhere in China (including cyberspace) as the downtrodden man in the street reaches his froggy boiling point.
Increasingly in China, though, those who see the writing on the wall can see that the days of system stability are numbered. And they’re not hanging around.
For a number of years, mainland Chinese buyers have accounted for nearly all new apartment sales in Melbourne and Sydney. On numbers I’ve seen, they have been investing between A$2 billion and $3 billion a year.
An increasing number of mainland Chinese are establishing permanent residency and sending their child(ren) to school and university in Australia. And Simon recently reported that from an offshore strategies conference in Shanghai that the room was packed full of Chinese people learning how to diversify abroad.
They all want to have their options open when China’s economy and political system hits turbulence.
Judging by the poor economic numbers coming out of China, this day of reckoning is drawing ever closer. One alarming indicator is that the Chinese renminbi has traded down to the lower limit of its strictly controlled trading band for SEVEN TRADING SESSIONS IN A ROW.
This suggests that there is more money leaving China than being earned from overseas trade or invested there. The exchange rate may be only one simple indicator, but it’s a great barometer for what is going on: China is not going to be the savior of the global economy, but rather another casualty.
If you have stashed some money in a Yuan-denominated bank account for the long haul, you’ll probably still be fine relative to other paper currencies. But, I would caution against expecting it to be a smooth, one-way ride to the top.
Personally, I’d rather have the bulk of my savings in real wealth: things like gold and silver bullion, productive real estate, and strong cash-generative businesses.
And for the cash that I do hold, it’s virtually all employed trading my 4th Pillar investment system earning superior risk-adjusted returns with minimal volatility.
[Editor's note: Tim's 4th Pillar investment system has delivered consistent gains throughout this year's massive market turmoil. Members following his trades have enjoyed a nearly 90% success rate. Next week, enrollment in the 4th Pillar will be opened once again for a very limited time, stay tuned for more.]