The 1979 movie thriller, The China Syndrome, was based on the fanciful premise that a nuclear meltdown in America could burn through the earth to China.
But this isn’t a movie. In this real-life implosion, China is about to melt down.
I’ve written before about how the Chinese government has been trying to prop up the country’s slumped economy. The central government has been telling the People’s Bank of China to lower interest rates, cutting bank reserve requirements, and telling big state-owned banks to keep lending to and backstopping LGFVs (Local Government Funding Vehicles). They abandoned zero-Covid restrictions, not because of protests, but to grow the slip-sliding away economy, prop up exports, and let the world know China’s back and open for business.
Now that call looks premature. Soaring Covid infections could lead to millions of deaths and bring China’s economy to a standstill, if not an uncontrollable crash.
And this time, the fallout will reach the other side of the world. Now is not the time to go bottom fishing for cheap U.S. stocks. Nor is it the time to expect recent upward momentum in recently bouncing Chinese stocks.
But you know what I always say: no matter what direction the market is going, there’s always an opportunity to make money. This situation is no different.
Let me tell you everything you need to know and the best way to play Chinese stocks going forward.
What to Expect from China’s Covid Meltdown
Since Covid-19 escaped from China’s Wuhan Institute of Virology, China’s government health ministry and other sources claimed the country experienced 1.91 million cases and 5,242 deaths.
That’s before a report from Foreign Policy revealed that a recent internal briefing at China’s Center for Disease Control and Prevention (CDC) claimed 250 million Chinese were infected with Covid between Dec 1 and Dec 20, 2022, a few weeks ago, including 37 million in one day. Mercifully, there were only eight deaths – or so the government claims, anyway.
The current and for now predominant subvariant of Covid is Omicron BA.2. Globally, assuming the majority of infections have been of the BA.2 variety, the associated fatality rate for this virus iteration is 0.3%.
Basic math implies that 0.3% of 250 million people infected in December in China adds up to potentially 750,000 deaths. At that infection rate it’s been estimated that in the next few months, if some 60% of China’s population becomes infected, or close to 900 million people, at the 0.3% fatality rate 2.7 million Chinese could die.
That’s if a new, more infectious, more lethal strain doesn’t emerge.
China’s emphasis on lockdowns and zero-Covid’s focus on containment over treatment leaves the country woefully short of ICU beds, treatment units, hospitals, and healthcare staff.
A metric I saw from a Chinese study said 92% of Chinese had at least one vaccine. Even if that’s true (though I doubt it is), China’s vaccine isn’t an mRNA (messenger RNA) vaccine, which is the most effective vaccine technology used globally against Covid-19. Even then, mRNA vaccines have to be modified to combat new strains.
China’s economy has already been reeling from lockdowns, slowing exports, fewer imports, the imploding property sector, and from overleveraged banks and local government financing vehicles. And from a declining population.
Now, despite the central government’s attempts to restart the proverbial engine, as I mentioned earlier, the Chinese economy is sliding again under the weight of all these new infections.
Cities are slowing down, and some seem to be shutting down on their own as the Chinese face out-of-control infection rates. It doesn’t matter to the Chinese population what metrics, like only eight deaths, the government puts out. They see overflowing obituaries in their local papers and know what’s really happening.
So it won’t be long before China shuts down as the U.S. did, only this time it won’t be from government lockdowns. It will be because citizens fear going to work, going out, and dying.
And just like the U.S. economy coming to a standstill and experiencing an instant recession, China’s turn is here.
Here’s What to Do Right Now
Bottom line: the recent bounce in Chinese stocks will be short-lived. Enjoy it while it lasts. If you’re smart enough or were lucky enough to get into some of the highflying Chinese names enjoying a huge bounce, stick with them. Just make sure you keep trailing your stop-loss orders up as the stocks keep rising. That way you can lock in your profits when the market turns.
What’s happening in China with Covid means slowing growth or, worse, a complete economic implosion that will impact the global economy and markets.
That means U.S. benchmark indexes are likely to see new lows, and Chinese stocks are likely to go down below where they just came from.
The way to play that is by buying put options on big tech Chinese names like Tencent Holdings ADR (TCEHY) and Baidu Inc (BIDU) as these stocks enjoy a rip-roaring rally. If you get in on cheap put options on the way up, you can ride them all the way down for spectacular gains.
They’ve had a nice run up, but there’s a big fall coming.
You’ve been warned.
— Shah Gilani
Source: Total Wealth