The China “Put”

China Bears

Here’s an interesting article about where the Australian economy sits amidst the global network of capital.

Australia had its very own “put” based on China. No matter what went wrong in Gondwanaland, the industrialisation of the world’s most populous nation would dig us out of a hole by paying us to dig more holes on its behalf.
All we had to worry about was a soaring currency that allowed us all to take cheap overseas holidays. When you’re living it up in Barcelona, really, where’s the problem?

The excitement this induced in the West quickly outpaced reality. In almost all industrialised nations, property rights and an independent legal system are central to the development process. Not in China – its path to prosperity remains a vast experiment.
The fall in the price of iron ore – by more than 50 per cent in the past year – has been the point about which the China Put turns, an excuse for all those long-standing concerns about Chinese growth to gain some air.

None of this is exactly unheard of. For a while we’ve been hearing stories from China where nothing is as it seems. Entire cities built with nobody living in them, massive public sector debt mounting up in the municipalities; how they can’t just hand out the same kind of massive Stimulus as they did back in 2008 during the deepest trough of the GFC.

In most part, it is true that the Australian economy is tied in to the Chinese economy quite firmly, and that this nexus is providing Australia with the extra bit of economic strength. It is then a little more than worrying to find out that the Chinese are looking for an out because they can’t see a soft landing.

On one level, the mining boom might have passed its peak, but there’s still a lot of building to go in both China and India. Those mines are going to supply those hungry economies. On another level, there is no guarantee that China is going to remain stable, good customers given that they carry so many risks for political (and therefore economic) instability. It’s hard to see how thse things are going to find their balance.

The big four banks are all indirectly exposed to a China slowdown, with their need to source funds from the wholesale money market their Achilles heel.

If funds dried up as they did in 2008, especially at a time when unemployment and mortgage stress was increasing, property values could tumble. That may quickly see a sharp increase in bad loans and pressure on capital adequacy ratios, which is where a banking crisis tends to start.

That bit there is the scary bit. The Real Estate part of the SMH is already spruiking a revival in the Real Estate market. It seems quite difficult to square such a revival with a scenario where the big four banks are going to get exposed to the China slowdown as projected.  You’d be a mug to take on a mortgage with China hanging off the sword of Damocles thread, so to speak.

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