The one thing that might ruin Xmas

This one really could go either way.

The other day, I laid out two big themes that are going to define 2022. Now let me give you a third.

3. China

What happens in China has a big impact on Australia, but really, the whole world is watching what’s happening over there right now.

And the news has been pretty quiet on it really.

China is in a fascinating space right now. They’re in the middle of trying to reshape their entire economy. I’m not overhyping that. They are.

Basically, the government thinks that some sectors are getting too big.

So we saw a crack down on the tech sector in the middle of the year, and then a crack down on the big property developers a few months after that.

This is still playing out, and it’s pretty massive. The government introduced a ‘Three Red Lines’ policy, which basically put limits on how much leverage the big developers could have.

And as it stands, two-thirds of China’s big developers are on the wrong side of those lines.

This is forcing the developers to deleverage, but it’s not going smoothly. Evergrande – the biggest developer in China – is already in default, along with 9 other major players.

We’re all hoping it unwinds smoothly, but you never know. Evergrande has over $300 billion (yes, billion) in debts, that it’s probably not going to make good on.

That could create a whole bunch of problems for the Chinese financial sector. And if the financial sector topples, you get some massive problems.

And that’s a big story for us, because China is still our biggest trading partner. And the Chinese construction industry is a big buyer of Aussie iron ore.

So much so, that the Aussie dollar tends to ebb and flow with the Chinese manufacturing sector. Check out the chart:

So a serious shake-out in China could have big implications for the Aussie economy.

And that’s happening at the same time as China and Australia are in the middle of a messy break up.

China has defriended Australia on Facebook. Australia is drunk-texting China in the middle of the night.

Basically Australia got caught up in a realignment of the geo-political poles of power.

For a long while, China and the US were best buddies. Or were pretending they were.

But those days are over, and the US now recognises China as a strategic rival.

That meant that Australia had to choose sides, and Australia picked America, (and we’ll have a side of nuclear submarines thanks.)

China wasn’t happy about that, and decided to retaliate by blocking certain Aussie imports.

Like wine. Aussie wine exports to China have taken a serious hit.

However, so far, this hasn’t hurt our commodity exports.

And basically that’s because commodities are fungible – one container load of iron ore is much like another, whether it comes from Australia or Brazil.

And so commodity exports are still booming, and Australia’s trade balance is still through the roof.

But this is a trend to watch.

The worst case scenario is that China’s development sector goes belly up, and China goes super hard on blocking Aussie imports.

That would hurt.

However, while it’s possible, it wouldn’t be my central scenario. It’d be much more likely that China muddles through the developer shake-out, with a range of stimulus measures to ease the pain, and we get more diplomatic grumbles out of China without any real policy action.

But it’s an open question. It really could go either way.

Big trends, big times

So these are the three big trends I’m watching right now, and I think every serious investor should have an eye on.

Ultimately, I think the outlook for Australia is very bullish.

But there’s never a dull moment in economics.

Anyway, that’s me for the year. Thanks for tuning in. I hope I’ve been able to make some sense of this crazy-arse year. It’s been a doozy.

I really hope you have a rejuvenating break, and I look forward to getting back in the saddle with you early in the new year.

Have a great holiday everyone!

JG.