China’s back in the news again, with its debt issues once again the problem du jour.
Fairfax media recently reported that the concern is not just the amount of debt on issue, but the fact that companies in unrelated industries have been going guarantor for each other to help them get a loan. When a corn oil company guarantees some debt for an aluminium company, there’s something a bit weird going on.
Potentially this leads to a scenario where weakness in one industry, like construction, spreads to other industries because of these loan guarantees. The guarantees are reportedly carried off the balance sheet (making it hard to evaluate the extra risk they add) and can be quite material, at more than 10% of shareholder’s equity.
This is a major concern for Australia, with China our largest trading partner. And since our biggest exports in 2014 were iron ore, coal, and natural gas in that order, you can guess who’s going to suffer:
Iron ore miners Fortescue Metals Group Limited (ASX: FMG), BHP Billiton Limited (ASX: BHP), and Rio Tinto Limited (ASX: RIO) will be first on the chopping block, especially since the companies defaulting on their bonds are predominantly in the steel or construction business. Construction company JCI International Group Ltd (ASX: JCI) could also be at risk, especially if the level of construction activity declines. As a service company providing a subcontracted workforce to major companies, I imagine its margins and the amount of work available will get hit hard.
Gas companies like Santos Ltd (ASX: STO) and Origin Energy Limited (ASX: ORG) may seem at risk due to their major gas export projects, although much of this gas goes to Japan. Reportedly, local demand for gas is also running red hot (and prices suggest that is the case), so I would not be overly concerned about these two businesses in the event of a China crash.
In the meantime, if you’re buying shares in Chinese corn oil companies, remember to check if the aluminium manufacturers are solvent.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of February 15th 2021
Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
- Results: Is G8 Education Ltd a buy for its 4% dividend? – August 27, 2018 12:22pm
- Results: Why the Adacel Technologies Limited (ASX:ADA) share price is down 7% – August 26, 2018 9:54pm
- Results: Why the Nearmap Ltd (ASX:NEA) share price is up 4% today – August 22, 2018 5:15pm