A year ago Paul Hodges of International eChem told us that a great unwinding was about to begin. Back then, China was still "fooling the world" into thinking there was real growth out there. There wasn't. Instead, China had an easy lending policy that combined with the stimulus policies in developed nations to create "a global commodity super-bubble to rival and perhaps even exceed the dotcom bubble in 2000 and the US subprime bubble in 2008". Paul reckoned this was unsustainable: by the first quarter of 2013, it was already looking dodgy, with each extra $1 borrowed giving a mere 17c extra to GDP. In 2007 that number had been 83c.
Paul was right. New lending is down by nearly 20% since 2013; the bubble is bursting; and the world has been turned "upside down" for commodity producers. You can read about the consequences of this for Brazil on page 7. But the turn in China (which is supported by its new leaders) is making waves across the developing world. There is, says Paul, a "debt-fuelled ring of fire" connecting Latin America, South Africa and South East Asia with Australia, the Middle East and Russia one that more stimulus might not able to extinguish.
So what next? Paul predicts oil at $25 a barrel and expects to see some major corporate bankruptcies among the big firms whose forecasts of their own performance assumed an oil price of $100. But here's the interesting bit. I got in touch with Paul to see if we could do a video interview with him on all this (coming next week!) and mentioned along the way that John Stepek and I are pretty positive on Chinese equities long term.
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I expected Paul to give me a stern lecture on the idiocy of investing in a failing economy. He didn't. He agreed with me. Once China stops wasting money and time on supporting the stockmarket and creating property bubbles, he said, "the potential is huge". Similar thoughts arrived from our China guru, Rupert Foster, this week (I've elevated him to "guru" status as a result of his brilliant timing in calling the Chinese market collapse at the beginning of the summer).
Investors must remember that China is an emerging market not a developed one, says Rupert. And then they need not to overreact. China isn't collapsing. It is just slowing down as it should, given that it needs to rebalance its economy from one focused on investment and superfast growth, to one focused on making people's lives better. It might take some courage to buy now. But if you have cash and a long-term view on the market, now might be a good time to start putting some in. There will be no straight lines here the market will be volatile and scary.
But we all reckon that in ten years being invested in China will be something to be pretty pleased about. That's not something we can say quite so wholeheartedly about the US. Why? I'll let Bill tell you that.
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