August 21st, 2023 | 08:00 CEST
China's shadow banks send first shock waves: Deutsche Bank, Allianz, Viva Gold
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"[...] We can make a big increase in value with little capital. [...]" David Mason, Managing Director, CEO, NewPeak Metals Ltd.
Country Garden is not the only problem
As Handelsblatt reported last week, the problems in the real estate market are spreading to the financial sector. The trust fund Zhongrong International Trust most recently acknowledged short-term liquidity problems. Such trusts are considered part of China's shadow banking system and have played a significant role in the development of China's real estate market. Property developer Country Garden has also already admitted to liquidity problems. Data from recent months also suggest that many international financial firms hold dollar bonds held by Country Garden. These include Blackrock, for example, but also Deutsche Bank and Allianz. In the case of the latter, the exposure stood at around USD 301 million as of the end of June, according to Handelsblatt. In the meantime, the holdings of the banks mentioned may have changed.
Deutsche Bank and Allianz: Where are Country Garden's bonds?
Although the banks mentioned above should be able to absorb defaults, the high number of international institutions invested in the Chinese real estate market shows the risk inherent in China. At the same time, more and more investors are concerned about how meaningful the growth figures from China are at all. China is repeatedly accused of embellishing economic data. How rigorous Beijing becomes when facts do not fit the picture is also shown by the fact that China will no longer publish details on youth unemployment with immediate effect. About one-fifth of graduates are without a job in China. While Beijing preaches renunciation and suffering to China's youth, things have been fermenting in the country not only since the protests against the rigorous lockdowns during the pandemic.
Shares from the financial sector, such as Deutsche Bank and Allianz, have fallen in the past week. While the price comeback in the one-year chart of Deutsche Bank has moved into the distant future, Allianz is still near its annual high. If the problems in the Chinese real estate market continue to spread and uncertainty grows, there could be a repeat of the banking panic of last March. To hedge against such uncertainty, investors can either short bank stocks or look to more exotic instruments, such as volatility ETFs. Even gold, currently priced almost as attractively as it has been in half a year, could benefit.
Viva Gold: Mini valuation - enormous leverage
Willem Middelkoop, the founder of the Commodity Discovery Fund, recently referred to continuing gold purchases by central banks in an interview in North American media. He said that China, in particular, has bought about 100 tons of gold since the turn of the year. According to Middelkoop, China is thus voting against the US dollar. The volatility on the US bond market also indicates, according to the market expert, that confidence in the greenback is waning. For investors who see gold as crisis insurance, the Canadian gold company Viva Gold could be interesting.
Viva Gold is valued at only CAD 12.3 million and, because of this, offers significant leverage on the gold price. The unique thing about Viva Gold is that the operating business of the Canadians is comparatively advanced for an exploration company. At the end of the year, the Company plans to start a feasibility study and then decide within another year on the construction of a mine. Initial calculations suggest that the chances of such a project are favorable. At the current gold price level, investments in a mine could pay for themselves in less than two years. The Tonopah project is located in the Walker Trend in the US state of Nevada and could go into production using both the low-cost heap leach method and open pit mining. Management, which has previously drilled grades of 15.7 g/t gold and 16.4 g/t silver at Tonopah, also sees further potential for new discoveries at the project. The share price has fallen sharply in recent months. There were no operational reasons for the sell-off. Courageous investors may see opportunities in Viva Gold at the moment.
After the stock market euphoria of recent months, more and more investors are focusing on risk and becoming more cautious. Problems could emanate from China and make for a hot fall. Heavily oversold stocks in the gold sector could benefit. Junior companies, such as Viva Gold, may offer experienced investors with a good sense of timing the opportunity for dynamic returns.
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