What will China’s changing priorities mean for Australia?

Did you hear the news about Chinese Premier Li Keqiang’s visit to Brazil earlier this week? I mentioned it in my update to subscribers of Sound Money. Sound Investments yesterday. Here’s the story from Reuters:

May 19 (Reuters) – Chinese Premier Li Keqiang came to the rescue of Brazil’s slumping economy on Tuesday with trade, finance and investment deals worth tens of billions of dollars in energy, mining, aviation and the upgrade of dilapidated infrastructure.

On his first official trip to Latin America, Li saw a raft of agreements signed, ranging from a $1 billion purchase of passenger jets made by Brazil’s Embraer to the lifting of an import ban on Brazilian beef and a long-discussed plan to build a railroad over the Andes to the Pacific.

“A new road to Asia will open for Brasil, reducing distances and costs, a road that will take us directly to the ports of Peru and, across the Pacific Ocean, China,” President Dilma Rousseff said, inviting Chinese companies to build it. Brazil and China agreed to study the feasibility of the rail link that would allow Brazilian exports to avoid the Panama Canal.

The story didn’t get any major airplay in Australia. But today, the Financial Review picked it up from another angle. It reported that China will lend Brazilian iron ore giant Vale US$4 billion to fund a major iron ore project (known as S11D) as well as invest in eight giant iron ore transport ships known as Valemax ships.

The investment will facilitate another 90 million tonnes of high quality iron ore hitting the market at a cost almost as low as what Rio Tinto can achieve.

That will push the industry cost curve lower again next year, putting more pressure on higher cost marginal producers like Fortescue Metals [ASX:FMG].

But the iron ore angle is a side issue here. Sure it’s important for Australia. It means the iron ore price is going lower and it will stay there for longer than most people expect. It means the juniors will all go out of business and Fortescue will be left hanging on by its fingernails. If it survives, all I can say is that it will have a lot more shares on issue than it does now…

No, the important thing to focus on here is the first part of the story as reported by Reuters.

This is not an isolated investment by China. In April it announced a US$46 billion investment plan for Pakistan, part of a proposal to develop the China/Pakistan economic corridor.

As reported by the ABC at the time:

The project foresees the creation of road, rail and pipeline links that will cut several thousand kilometres off the route to transport oil from the Middle East to China, while bypassing mutual rival India.

The upgrade will stretch 3,000 kilometres from the Pakistani port of Gwadar on the Arabian Sea to China’s western city of Kashgar with $11 billion set aside for the corridor project.

The two countries are also set to cooperate in gas, coal and solar energy projects to provide 16,400 megawatts of electricity – roughly equivalent to the country’s entire current capacity, Mr Iqbal said.

But this is not all. The Pakistan announcement is part of a much larger project. China announced it to the world in late 2013 but it didn’t receive much attention. That’s because we here in the West focus more on what Stevens, Draghi or Yellen have to say, rather than paying attention to the real issues unfolding in the world economy.

And what China is currently undertaking is massive. Within a decade, it will change the face of global economics.

For the past few years I’ve generally been pretty bearish on China. I’ve looked at it through an Australian lens, which admittedly is pretty narrow. That is, the China boom created a boom for Australia. Now, its post-boom transition will continue to hurt Australia’s debt-soaked economy.

I still hold that view. Australia will be one of the great losers from China’s changing economic priorities.

The investment in Vale is an example of that. China is happy to invest in bringing good quality iron ore to its markets cheaply. It knows more supply means lower prices. Lower prices will hurt Australia. After copping years of high prices, China hardly cares about that.

But there’s one thing I’m bullish about regarding China. And that’s the big picture strategy it’s now pursuing. This is a multi-faceted strategy that has major global ramifications. I’ll discuss this strategy in more detail tomorrow. It’s also the subject of a special report I’ve put together. You should have it in your inbox on Saturday.

I’ve been following and researching this story for months. I’ve already recommended a few stocks that are set to benefit from China’s strategy. Mind you, there aren’t too many that will. China’s transitioning economy will have a major impact on Australia for years to come.

But there is a sector that I think can do well in the years ahead, or at least a select few stocks in it. It’s a classic value play. This sector has been knocked around for years. Share prices are well off their highs…unlike the banks, for example.

But recently there have been signs of life. Share prices are off their lows and starting to grind higher. This tells me we could be at the start of a long term trend change.

There are many facets to the story…the China angle being just one of them. But if I’m right, you could be looking at the next great growth opportunity in the market.

Let’s face it, banks have had their run. Income stocks, while still attractive given the low interest rate environment, are more ‘income’ than ‘growth’ these days.

I’m looking for stocks that could provide solid growth AND income in the years ahead. This is a long term emerging trend that could prove very lucrative.

Tomorrow, I’ll give you the run down on China’s strategy…how it could change the global economic order in the years ahead, and why some stocks are set to benefit.


Greg Canavan+,
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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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