Let’s look at the clues and see what we have today. Chinese exports grew by 17.8% in the last twelve months. But imports to China surged even more, up 56%. Base metals, precious metals, and virtually the entire commodity complex rallied on surging Chinese demand. New ETFs for platinum and palladium fuelled investment demand in the commodity story. February gold futures traded at $1,151.40 overnight.
Our resource man on the ground, Dr. Alex Cowie, sent us a short research note yesterday. It was mostly good news, with his recent recommendations riding the rally higher. He had several double-digit winners and a few triple-digit stalwarts. He concluded his note thusly: “Personally I am really bullish on resources for at least the first half of 2010. Then the China question comes in. I am still reading, thinking and reading some more about this.”
But here’s the thing. We wonder if the surge in commodity prices (and stocks) is related to a rushed dash by Chinese investors to borrow before rates go up and shove the money into a higher-yielding asset class. As mentioned yesterday, the People’s Bank of China raised the yield on three-month bills for the first time since August. This may signal a tighter (anti-inflationary) monetary policy in China.
In the meantime, however, the Chinese seem to be buying up anything that’s not paper. All up, the move feels like the end of something and not the beginning of a new rally. It may not mean that the Chinese bubble in real estate and stocks is popping just now. But if the Chinese central bank does rates, what are the unintended consequences?
Well…putting our anti-thermonuclear heat thinking cap on (it’s pretty hot in Melbourne now) we’d say this accelerates the movement of Chinese capital out of real estate and Chinese equities and into, at least in several examples, Australian resource equities.
Granted, the trickle of Chinese money into Australian housing and equities is small compared to the growth in bank lending. In the first week of January – presumably in the rush to beat tighter reserve requirements or higher rates – Chinese banks lent out a healthy US$88 billion. But all of last year, the number was much bigger.
Chinese bank lending surged by over US$1.35 trillion in 2009, according to Shaun Rein at Forbes. Much of that money went into stocks. And a lot of it went into Shanghai and Beijing real estate. Whether China bought itself a bubble is a very good question. One important point is that Chinese lending is based on savings…and isn’t borrowed (in U.S. fashion).
Given those loan volumes, even a slight worry about tighter monetary policy or inflation would explain a drive into commodities and commodity stocks. For example, take the Tampakan copper and gold project in the Philippines. It’s a 2.4 billion tonne inferred resource which may produce around 13.5 million tonnes of copper and 15.8 million ounces of gold, according to pre-feasability studies.
That would be a handy little resource to get your hands on. It’s owned jointly, at least until this week, by Aussie-listed Indophil Resources (ASX:IRN) and global mining behemoth Xstrate, via a majority holding through another company. But yesterday Australia’s Foreign Investment Review Board approved a takeover of Indophil by China’s Zijin Mining Group.
Zijin is no upstart. It’s China’s largest gold producer and third largest copper producer. It’s bid values Indophil (including its stake in the project) at $545 million. Indophil’s market cap yesterday was $491.4 million, according to Google Finance.
Frankly we have no idea how long China Inc’s asset purchase program is going to last and whether its derivative of a lousy credit policy by the People’s Bank. But it’s surely a better policy than having your central bank support your mortgage market via quantitative easing. In one case, you take real money to buy real assets. In the other, you print new money from nowhere to buy assets that are falling in value anyway.
This is why if you’re going to be in the equity markets at these valuations and with so many open questions about what 2010 holds, you could do a lot worse than park yourself in the Aussie resource patch, get a good tip sheet, and take a few punts. The only caveat we’d introduce is you should try to front-run the Chinese. If you’re riding on their coat-tails, you’re probably already too late.
For example, in September small-cap maestro Kris Sayce issued a sell recommendation on Perth-based Bauxite Resources (ASX:BAU). The share was up 388% from the recommended entry price and Kris reckoned (correctly in retrospect) that everything good you could expect to happen to the share had happened.
Today we read that BAU has signed a Heads of Agreement with Yankuang Corporation to jointly develop an alumina refinery in Western Australia. There is many a slip between the cup and lip. But in principle, the deal is simple: Bauxite’s directors and geologists scoped out great alumina deposits in the Darling Ranges south of Perth.
Having spoken with them at the time, they reckoned bauxite could become the next iron ore: a key raw material in China’s next stage of industrial growth. Getting in early was the key, and identifying a valuable resource and a mineable ore body. That’s just good old fashioned analysis, though, and nothing exotic. No Nostradamus required.
The main point: you have to be about a year and a half ahead of the story hitting the papers. That means you could be too early, wrong, or risk looking like a hyperbolic fool (something we’re often accused of). But hey, it beats getting your share tips from CNBC.
Other signs of the changing times? China became the world’s largest car market last year. Over 13.6 million cars were bought by the Chinese last year. Over in the USA, 10.6 million vehicles were sold.
Speaking of the U.S., did you see that the yield curve – the spread between 2-year Treasury yields and 30-year yields, grew to its widest ever level at 380 basis points? This tells you two things. First, investors are loading up on the short end of the curve, driving down yields. They’ll buy U.S. debt for now, but not for longer-terms.
Second, the U.S. government must be getting the dry heaves about now. It’s shifted much of its borrowing burden to shorter maturity bills and notes. And as you know, it’s about $3 trillion in the next 12 months. Where is that money going to come from?
for Markets and Money