There is something going on at the other end of the planet…
You know me; I’m not the guy who predicts the next market crash on a quarterly basis. And this time, I’m very worried about China. I don’t know yet how hard it will hit our country, but one thing is for sure; China’s bubble is going to burst and hit the stock market like a rock. Since 2008, the market has gone up every year (besides 2011 in Canada). 2013 was an amazing year for dividend investors where my US stock picks did 37.06%. Since then, I’m looking everywhere for the next bubble. I’m a pretty optimistic guy, but there are now two things that really bug me. The first one being the Canadian housing situation which seems to be falling into the most optimistic scenario for now with a smooth slowdown. The second thing that bugs me is China and how they escaped the 2008 recession. This bubble is about to burst…
China is the Second Economy in the World
China is not the manufacturer for the world anymore; it has become a very important economic player. Due to its impressive reserve of US dollars, it even had the “guts” to comment on how the US government was handling the 2008 credit crisis. China’s economy has been growing in the double digits since the early 90s. It has slowed down to 7.5%-9% recently but it is still a higher growth than industrialized countries.
China was among the few countries which weren’t affected much by the 2008 recession. In fact, the BRIC kind of lifted the whole world out of the recession. The result was impressive, but the solution China found back in 2008 to avoid the recession may very well blow up in our faces today.
How China Skipped the 2008 Recession… and How it Will Cause Their Biggest Headache
After seeing its “book of orders” melt in 2008, China realized it was impossible for them to maintain their growth level by simply exporting their goods. Their biggest clients (the USA & Europe) were cutting down on their expenses and this was leaving many workers unemployed. Instead of leaving the cold hearted capitalism work its magic by wiping out companies, the Chinese gov’t decided to react: Beijing started the most impressive infrastructure program ever built. They built entire new cities looking like London, Paris and New York. From 2008 to 2013, they built so many skyscrapers that Manhattan looks like a small Lego cities package. The plan worked: China’s growth kept rolling and the economy was saved….until they realized that all these skyscrapers are STILL EMPTY.
They blindly thought: “build it and they will come”, but no one has showed up yet. Some cities have been built for 500,000 citizens and yet, only a few thousand have bought one of those rich villas. There are dozens of ghost cities in China and this is becoming a real problem that can’t be hidden.
So far, it hasn’t been an issue since the Communist Gov’t had backed any company in financial trouble… until recently. They actually decided to let Real Estate Promoter Zhejiang Xingrun Real Estate Co go down with their debts (567M$). You want my guess? This was their Bear Stearns story. This is the first company to go down, but many others will follow. It is simply impossible to keep huge buildings alive without tenants. A few weeks before this event, Chaori Solar Energy Science & Technology announced their first default on debt payment. Once against, the real estate bubble will burst.
The whole financing system is also very hard to explain as it includes complex “shadow banking”. I’m not talking about some sort of evil force of nature with super powers here, I’m talking about a parallel financing system that doesn’t appear on Chinese banks’ balance sheets (doesn’t it sound like subprime mortgage and commercial backed securities to you?). Since nobody can really understand what is happening in the Middle Kingdom, the information is slowly leaking and the problem hasn’t spread around the world yet.
I don’t like people screaming their heads off that the world is going to collapse, but I’m pretty sure the Chinese Housing Bubble is not going to help us on the Western side of the world.
How China Affects Your Dividend Holdings
First things, first, if you hold any Canadian resource companies, I would consider selling them. The price for commodities and metals will most likely continue their drop if the bubble in China would burst. The Chinese Gov’t has the money to back up their companies, pay their dues and keep their system alive. However, they will definitely stop consuming resources at the pace they were. It has already started since 2011 and it will simply continue to get worse.
Then, don’t expect companies focusing on their Chinese market to become stellar dividend stocks. Strong companies such as Coca-Cola (KO), Wal-Mart (WMT) or McDonald’s (MCD) will survive this crisis but they won’t publish their strongest results during this period either. Most US consumers will be hurt but they will rely on a very strong base of clients in the US.
Try finding companies strong in the US and / or Europe. They will less likely be affected by what is happening in China. Still, I’m not too enthusiastic about this situation, are you?
Disclaimer: I own shares of KO, WMT and MCD