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China's Evergrande Gets Liquidated And What It Means for the Global Economy

Could it get worse?

China's Evergrande has just been ordered by the courts to be liquidated. The problem first surfaced in 2021 when the Chinese real estate giant missed a payment to their bondholders. And the problem has been rolling along since then.

There have been discussions of whether the Chinese government will bail out the company. But a few hours ago, a judge ruled that Evergrande's assets should be liquidated.

I think the Chinese government is right for allowing Evergrande to fail, making it clear that there is no such thing as "too big to fail" in China. However, this has its consequences too.

Capital outflows from China in recent months have been substantial. American investors are hoping that China becomes like the Western countries, propped up by stimulus at any sign of failure. But China is refusing to be one.

This doesn't mean that there is absolutely no stimulus by the government to backstop this event. Yes, there is. But it will not be used to bail out the failed companies. It will be used to boost the economy in other ways.

I consider that a good move. And China is currently having its 2008 moment right here. Let's not forget that in 2008, the US government allowed Lehman Brothers to fail. And then, out of fear caved in and started bailing out the others.

So, the real question now is, will China stand strong and refuse any and every bailout? Or will the liquidation of Evergrande trigger fear and make Beijing bail out the other distressed companies? Oh yes, there are others.

The Implication on the Global Economy

The investing world has looked to China as the growth engine over the last decade (before 2020). China was delivering double-digit growth every year.

The lockdowns blew a hole into that narrative. And investors were optimistic that it will be business as usual when China finally reopens.

Well, China has reopened and it is not business as usual. In fact, there is a lot of pressure on two important sectors of the Chinese economy - the banks and the real estate companies.

I have the hypothesis that the money leaving China is just going to park at the magnificent 7 on the US stock exchange. And that will continue until there is a real recession scare in the US.

You can't depend on China for growth anymore. China will still keep growing but not at double digits anymore. At least, for the rest of the 2020s.

Here is My Prediction for China

Real Estate has been a major growth engine for the Chinese economy in the past years. But that has been dealt a severe blow. Now, China has to find another growth engine. And currently, there are two industries the country is looking to capitalize on.

The first is the semiconductor industry. Hence, the sudden heightened interest in reuniting with Taiwan. Taiwan is the world leader in semiconductors and everybody else is far behind. China would love to take advantage of this.

China has an advanced semiconductor industry too. But it is far behind what Taiwan has currently. And it will take a while to catch up.

The second industry is the Electric Vehicle. China is betting hard on EVs as the next engine of growth. Unlike the semiconductor industry, they actually have a hedge here. And I predict China to beat every other country on EVs except (maybe) America's Tesla.

BYD is China's current ace card when it comes to electric vehicles. China is obsessed with building the future. And cheap electric vehicles (not just cars) are the future. (Combine that with autonomous driving too).

Yes, China will win with EVs but it is still too early in the game. In my estimation, EVs will start going mainstream across the world in the 2030s. That is when the Chinese economy will start reaping the full benefits.

However, pending that time China needs another anchor to the economy. Leadership in EVs is not enough to hold up the Chinese economy in the near term. The semiconductor industry is also not strong enough yet.

Real Estate and banking are weak. China needs another ace fast, otherwise, the economy will suffer pain in the short term.

Some have suggested that China will invade Taiwan out of desperation. But that is not a good move. It will make China vulnerable and make things worse. The long-term plan for Taiwan might work but if it gets rushed, it will only make things worse for everybody.

In my opinion, China doesn't need Taiwan in the long run to thrive. Now that the world has seen that semiconductors are a vital part of the future economy, everybody has joined the race. For example, the US is now building advanced semiconductor factories (like the ones in Taiwan). In less than 2 decades, Taiwan will no longer be the semiconductor leader (as a standalone country).

If I were an adviser to the Chinese government, I would recommend that the government focus on two areas - energy production tech and healthcare tech.

If they make good products (that are not too expensive) for developing economies, that will be a huge value driver. The only idea is that when targeting developing economies, don't make products to sell to big organizations. Instead, make simple stuff to sell to individuals. At scale, this will drive enough momentum spending the time EVs kick in high gear.

Conclusion And Caution

When investing in China, be selective. And always make sure that those bets are in the "future" quadrant of your portfolio.

China doesn't belong on the growth side of your portfolio anymore. Unless you are a Chinese person and you can see more and filter better. Over the long term, I think China will be fine.

I speak practically on China strictly on an economic basis as investing analysis. My views do not intend to portray any stance or favourability on politics, culture and the likes.

Stay rich.

P.S. If you are curious about what I mean by the "future" quadrant, you should read the millionaire investing playbook 

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