Peter's Perspective
17th March 2016 by Tama Churchouse

The Right Call… But No Profit to Show for it

Tomorrow Peter heads to Beijing for a 36 hour visit.

It’s a short trip, but when a Chinese multi-billionaire tycoon extends you a kind invitation to a small private dinner, it’s always well worth making the effort to be there.

As we’ve mentioned many times, discretion in this part of the world is imperative so I won’t reveal their name.

But this individual always offers a keen insider perspective in what’s really happening on the ground in China.

So it’s well worth the trip. And ‘boots on the ground’ is the best research there is.

Why do I mention this?

Well, because it was an encounter with this individual at Peter’s home here in Hong Kong that provided the foundation for a previous edition of The Churchouse Letter.

It’s an edition that is particularly relevant right now.

Let me give you some of the original excerpts:

“If you think you’ve seen a lot of Chinese money pouring into Western markets so far, then think again. You ain’t seen nothing yet. A dribble is about to become a torrent.”

“For the past 35 years, the big China bear has been sucking our capital into its financial system. Fueling the country’s headlong rush out of the depths of Maoist economics needed cash. And lots of it. But this has been a one-way flow.”

“But things have changed. The money is now moving in both directions.”

“China’s drive to liberalise its capital account and its domestic markets will ensure that these flows grow dramatically in the coming decade.”

The flows will be huge. Riding the wave of those flows will be lucrative for those who see where they are going.”

“Since the onset of the global financial crisis, large numbers of Chinese companies and individuals have been pouring cash offshore.”

“China has been opening its capital account and allowing increased flows of money, particularly outwards.”

“I am certain that the balance of flows will be hugely tilted to outflows of money from China into foreign assets, rather than the other way around.”

“We are at the beginning of a gigantic migration of money out of China into the global economy. The numbers are staggering.”

You’ve probably been reading these kinds of conclusions in the media recently.

We wrote these excerpts in October… of 2014.

China Net Inflows & Outflows - Quarterly in US$bn from 2007 - 2015.

In fact, this is one of the reasons why we haven’t panicked about these capital outflows (see “The Remninbi? Do Yourself a Favour & Ignore the Hysteria” for example).

Peter had a strong sense this was coming. And I think we did a good job of discounting the deafening bearish noise we’ve been hearing for months now on the state of the renminbi.


Example?

Well, since our “Ignore the Hysteria” piece, the renminbi is down all of 1.84% against the U.S. dollar.

This is hardly the collapse that many were led to believe was imminent.

But I’m writing today to apologise.

Why? Because we let our subscribers down.

You see, we made the right call.

But we failed to come up with a meaningful and straightforward way for our subscribers to profit from it.

And here’s the problem.

We still can’t provide a simple pure-play way for our readers to capitalise on this “gigantic migration of money coming out of China into the global economy” that we wrote about a year and a half ago.

I remember sitting there with Peter back then. We were wracking our brains on how best to trade this colossal rebalance of capital.

But we couldn’t provide that answer then, and we continue to struggle now.

We originally thought Chinese banks might do well from all the M&A activity for example. But they are weighed down too much by other concerns (non-performing loans, slowing domestic growth etc..).

International real estate? Yes, a beneficiary for sure… but again, we couldn’t find an easy avenue for our readers that would efficiently ‘front run’ the exodus of capital we’re seeing out of China.

Incidentally, just because we’ve been right on the ‘macro’ call so far, it doesn’t mean this can’t change. We are constantly challenging our views internally.

In my experience, the moment you sit back and give yourself a pat on the back thinking you’ve got it all figured out, the market gives you a quick slap across the face and reminds you who’s in charge.

So we continue to question everything… and query all our underlying assumptions.

I’m looking forward to hearing what Peter comes back with from his trip.

Good investing,

Tama

P.S. In the upcoming April edition of The Churchouse Letter, we’ll be making another big call on a potentially seismic event.

But this time, we have a multitude of ways to profit from it.

I look forward to sharing it with you soon.

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