China’s capitulation? Part 1 – How Iran and Venezuela could kickstart its demise

As you may know, I went to Hong Kong to spend Christmas and New Year with my relatives and friends.

This was our third consecutive trip to our homeland. We were there in November 2023 and October 2024 too.

Back then I shared some of my experience of Hong Kong life and gained some insights into where people’s minds were at.

In this trip, I gained more insights as I walked the streets and talked to my relatives. These insights will make you think twice about taking what Western analysts tell you about China’s resilience.

Economically speaking, Hong Kong has further weakened. There were more empty shopfronts, temporary stores, and prices were stagnant.

I remember what I paid to buy things in my previous two trips. Having enjoyed the precious metals bull market, we felt we could be more liberal with our spending this time round.

If Hong Kong’s economy is weak, you can imagine what it’s like in the Mainland. They’re worse… way worse.

Societally, you could tell that many people are fed up and almost at the point of disengagement. The most recent disastrous housing estate fire in Tai Po’s Wang Fuk Court revealed the corruption, incompetence, and callousness of those in power.

During this trip, I took my son, Cyrus, to see the burnt-out buildings. With tears in my eyes and a cracking voice, I told him how thousands of families lost loved ones and their homes. These people will have a sad Christmas and a long road to rebuild their lives.

I reminded him the importance of working hard and being honest, because this disaster was a result of greed, malfeasance, and sloppiness. The damage was deep and widespread, touching the lives of every Hong Kong resident.

From the way things unfolded after this disaster, the people in Hong Kong saw that the incumbent party focused on saving face and maintaining an illusion of control. They wanted to paper over the tragedy so everyone can forget about their role in causing it to happen.

It was basically behaving just like the ruling party north of the border.

However, this won’t happen. The tragedy may well go down in history as the turning point when Hong Kong will show the Beijing government it’ll never extinguish the spirit that made it distinct from its mainland overlords.

Speaking of the Chinese Communist Party, there may be something else that it should be more worried about: the latest developments in Iran and Venezuela.

These developments could accelerate the change in the global order, rewriting history.

I intend to spend the next few weeks focusing on how China faces the threat of capitulating under a combination of external threats and internal implosion.

Let’s start with Iran and Venezuela…

More than regime change –
identifying the true target

2026 has started off with a bang, hasn’t it?

More than a bang, but many.

Not just in Caracas, Venezuela, but in Iran too. As I write, we’re watching what may possibly be the beginning of the end of the Ayatollah regime that has ruled what used to be Persia since 1979. There may be millions of Iranian citizens who are out in the streets resisting the regime that they feel have oppressed them.

What could happen going forward is still on the balance. However, one thing is certain.

The capture of Venezuelan President Nicolas Maduro and the clashes between Iranian protesters and the Iranian security forces on the streets won’t just affect the two countries.

China will feel the brunt of the impact should there be a change in who runs the two countries, especially if they change military and economic allegiances.

In fact, China may well be the ultimate target, with Iran and Venezuela being the necessary pieces to deal with to achieve the goal.

Common enemies forge
unlikely allegiances

For many years, the Western nations deemed Iran and Venezuela as pariah nations arising from the differences between their incumbent governments and Western values.

The result was their exclusion from trading on normal terms in the markets. Iran faced more severe restrictions as it lost access to the SWIFT system, an international platform that facilitates cross-border payments. Without access to the SWIFT system, it’s difficult for them to trade with other nations, and earn revenues from their exports. It’s like having cash in your wallet but no credit card while most shops in your area insist on card payments only.

Incidentally, both nations own large reserves of oil, yet sanctions imposed upon them meant they could only sell it via back channels and black markets. So they receive less than the prevailing price in the commodities exchanges as they are forced to accept discounts. Iran currently receives around US$6-10 less per barrel sold, while Venezuela also must accept a discount on its inferior quality oil. The restricted access to international trade and discounts on their exports stifle the balance of trade and the welfare of their people.

Few countries do buy oil from Iran and Venezuela, with the two biggest buyers being China and Russia. Their size and military capabilities allowed them to break ranks from other countries that adhere to the SWIFT system without facing costly penalties or repercussions. In return, they forged a strategic military bond, in addition to trade.

These countries share common enemies and agree loosely on political ideologies. However, their geographic locations, cultures, and values are disparate, meaning their cooperation comes more from necessity and convenience. This tenuous bond means that they may change sides, whether by incentive or pressure.

The linchpins of the Chinese
manufacturing powerhouse

China is currently the world’s preeminent manufacturing powerhouse. It began soon after the economic reform implemented by former Chairman Deng Xiaoping in the 1990s. The reform received an additional boost from its admission to the World Trade Organisation and further from the aftermath of the subprime crisis, when many manufacturers in the West went offshore to pursue lower labour costs.

For many generations, Chinese people had a conscientious and compliant attitude, making them more reliable and effective workers. They also were more frugal and had a penchant to save rather than consume. These characteristics helped the Chinese economy to enjoy solid growth in the early stages of this economic change.

Moreover, the growth in domestic manufacturing helped China improve its bargaining position to negotiate favourable terms on its imports, including natural resources. A combination of low labour costs, a dominant market share, and access to discounted natural resources cemented China as the world’s manufacturing powerhouse.

China’s oil purchases from Iran and Venezuela comprise around a sixth of its total sources. While not a substantial proportion, the discounts received on these sources aren’t trivial in contributing to the bottom line of its buyers and users.

However, this could change quickly given the latest developments.

The Trump administration’s move on Venezuela isn’t just destabilising the government there. It has just struck a blow to China’s economy by aiming at its oil supply. The administration has re-routed a large portion of Venezuela’s oil production to itself. To top it off, it threatens to impose a 25% tariff penalty on countries that trade with Iran.

Venezuela is the side dish. Iran is the main course.

While China losing a source of cheap oil from Iran and Venezuela won’t cripple its economy, it could pose serious threats to profit margins.

One thing is clear, the tariff wars that began last year have escalated substantially. China is indeed on the crosshairs. Its vulnerabilities, both from outside and within, are put to the test. And what may happen to China should interest you.

We’ll cover these in later weeks.

Why the coming commodities
boom matters to you

Meanwhile, I want my series to provide not just insights and hypotheticals to engage and inform you. I’d like to offer potential investment opportunities that may enrich you and those near and dear to you.

The coming commodities boom is assured, regardless of whether China can stand strong or capitulates.

As the Chinese saying goes, ‘the arrow is in the bow, there’s nothing to stop the firing’.

What may change is which commodities, sectors and companies will stand to gain the most in this epic contest of strategy and posturing.

That’s why you should stay tuned to the changing dynamics and be ready to readjust your investments to suit the times.

My colleague, James Cooper, is keeping an eye on the commodities market and providing valuable actionable insights to his readers via his service, Diggers and Drillers.

Check out his latest video where he highlights the potential opportunities in strategic minerals arising from the current geopolitical developments.

That’s it from me for this week. Stay tuned next week as I discuss where Western analysts on China get it wrong about the country’s economic position and potential.