What will China’s changing priorities mean for Australia?

I’ve managed to convince Kris to let me write to you over the next two days. That’s because I’ve got something important to tell you. But it’s a pretty big topic, so I’ll need a few days to get it all out.

The story is about China mostly. But not in the way you’d expect. This is not about China buying up our resources or creating another iron ore boom. It’s about China’s plans to re-write the global economic playbook. They’ve been underway for two years, but now things are starting to pick up steam.

It’s also about how you can expect to profit from it. In general, Australia won’t profit as much from China’s future as it has from its past. But a few companies could do very well from the long term strategy that China is now implementing.

Right then, let’s get into it…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 exportsto 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.

Regards,

Greg Canavan,
Contributing Editor, Money Morning

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