First of all, I am a farmer, so events in China have little to do with me, although two of our four tractors were built in China, and about half of the equipment on our biodigester was also manufactured in China. I checked, so there is supply chain exposure.
After my dinner with friends of ours I went down the "Chinese rabbit hole" and one statistical item, if true, is catastrophic for the Chinese economy in general and savers specifically. At least two Chinese government agencies reported that there are more than one billion excess apartments in China.
Despite having left the firm some years ago, I am still good friends with the current chief economist, out of the blue he called me to congratulate me on the blog. I thought that it was nice and we had a short conversation about China, and he said, the firm has no exposure so it's not a problem, plus the Yuan is not freely convertible so there is almost no systemic risk.
He then related the following story, he swore that this happened to a mainland Chinese client of the firm The client is well-off. Following the lifting of the Covid restriction, his family decided to sell all their domestic real estate holdings. They sold twenty-two apartments in all, mostly near Shanghai. The client indicated that their average loss on sale of all the apartments was 22%. The last one sold last week and they lost 88% of the purchase price. In most cases these apartments had been owned by the family since 2010. The last one to sell was purchased in 2018 for the equivalent of US$ 850,000. It sold for US$ 68,500 last week. My ex-colleague tells me that his client is a contrarian, the family was shocked by the losses, but he insisted that they were better off selling now.
Now this is second-hand information (if it's true at all) although I didn't seek this information and my ex-firm has no stake in the trade.
This is where it gets interesting, since the early part of the summer, there has been a quantitative analysis of the exposure of each of my ex-firm's investments to China. It should have been painstaking work, he said, but this is the amazing thing. In 90% of cases, when my ex-firm contacted a portfolio company, they already had the analysis at hand. It indicated one thing: Not only investors but companies that trade with China are concerned not with risk-return but with physical exposure. That means they are focused on capital preservation, and supply chain issues and not yield.
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