Tag Archives: China

View From The Couch – 06/Sep/2014

Lessons For A Saturated Economy

I found this commentary about the impact of the property bubble in the Sydney Morning Tabloid this week. it’s written from the perspective of the younger people who cannot get into the market. A lot of people seem to think it’ young people whining, but there are lessons in history from all this property bubble business (that all these banks are denying exists here). The experience in Japan in the late 1980s through to earl 1990s was pretty instructive. The Bubble and the aftermath of the Pop created economic havoc on the Japanese Gen-X who were coming into the workforce at the time. This resulted in high youth unemployment as well as low rates of marriage and birthrates – and effectively brought forward the peak population date of Japan. The resulting impact of that event was that all the projections the government had made about pension plans and how the labour force was going to support the retiring Baby Boomers went out the window. Much of the low growth and sluggish economy of Japan in the aftermath of The Bubble can be put down to a generation of working people essentially placed out of options and never finding the traction that earlier generations had.

I have friends who are basically economic refugees from Japan. They got out because there were no immediate options that were rewarding or befit their education. Many ended up without kids, others delayed having kids. The 90s and early 2000s saw a remarkable exodus of young, educated Japanese people, who are now not over there contributing to economic growth.

The process of writing off and paying down debts in Japan has been grueling, and worse still government intervention into what they called PKOs – price keeping operations for assets – has distorted the markets leaving what can only be called zombie companies.

The PKO money came out of the government to shore up the asset values of shares and property which is to say, they socialised the debts. The Japanese government under Ryutaro Hashimoto argued that this was necessary to stop a disorderly exit, which is to say, it allowed some investors to keep their bubble profits to pay off the bubble debts instead of getting wiped out. You wonder how those parties got to enjoy such favourable treatment, but then if you see how entwined Japanese heavy industry, banking and the old MITI was in its day, it was one of those things that people acknowledged tacitly without putting up a big fight. After all, what happens to Japan should Mistubishi or Sumitomo should fail? The option cost of bailing out those companies essentially ate the future of Japan.  And that’s just Japan. The GFC has exposed the same problem in advanced economies across Europe and North America as well as Australia and New Zealand.

The point of all this is to say, private sector debt has a way of becoming public sector debt, and “too big to fail” essentially eats the future. A few things are very clear from the property bubble in Australia is that the private sector debt is bigger than it has ever been, and should it get called in, it would wipe out our four major banks (BASEL II and III notwithstanding). Because those banks are still in the TBTF category, the government will socialise those losses by bailing them out, and then we’ll see our future spending go up in smoke to preserve the inflated prices everybody paid for their houses.

The finer point of all this is, if you don’t think there’s a housing bubble, then that’s one problem. If you do thing that there is a housing bubble but think it’s just a matter of the market correcting itself, then you’ll be in for a surprise.

Ross Garnaut Says There Is a Bubble – But So What? Cut Rates

This one‘s related but really interesting. Ross Garnaut thinks there is indeed a bubble going on in the housing market, and that the Reserve Bank of Australia is keeping a close eye on it. Basically, Garnaut is saying the rest of the economy outside of housing could do with the lowering of rates. The rates being as they are keeps the Australian Dollar too high, and makes Australia’s economy less  competitive. The only thing keeping the rates where they are, is this deep concern that there is a housing bubble going on, so the rates need to sit at as high a place a possible given the parameters. Instead Garnaut is saying if the RBA cuts rates, then the rest of economy would be able to compete and grow, and the housing bubble should be dealt with specific measures. He also says governments should stop favouring housing for the purposes of capital adequacy.

“It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP,” he said.

“And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership.

“It would also contribute to putting a lid on the housing bubble so we could reduce interest rates and the exchange rate as required by the rest of the Australian economy.

“But the problems can’t be solved by the Reserve Bank alone. It requires co-ordination of prudential regulation, monetary policy and fiscal policy.”

It’s an interesting idea that evokes the old definition of inflation. Inflation, is essentially too much money chasing too few assets. This explains exactly why housing bubbles happen. Given that housing is given a privileged position in measuring capital adequacy, banks are better off lending out mortgages than lending out business loans for capital expenditure. The money headed to mortgages become much easier money by dint of a definitions for capital adqaucy. This devalues businesses against property ownership, even though property ownership in of itself – especially home ownership – can’t contribute to the economy in the way that a productive business can. Things like negative gearing simply make it worse. So all the money goes into the property market but of course the overall supply side of the property market itself can only grow at a certain rate. As more money gushes into the property market, it can do nothing but create a condition where the prices of homes inflates. Too much money chasing too few assets.

Is China Finally Wobbling (Just A Little bit?)

It’s been like five and a half years since the market bottom following the Lehmann Shock which triggered the GFC. Since then the world has looked on… make that Australia… Australia has looked on to China to keep its economy afloat. China in turn obliged by doing massive stimulus spending, which resulted in it sustaining its 7%+ annual GDP growth rate. There are some who think China has been inflating its GDP figures for years to get more investment, and think there is a 30%discrepancy between what China’s real size as an economy is and what the stated size is. That would explain the vast lack of growth in consumer spending that China has so needed to move from an export-driven economy to a consumer driven economy.

China subsequently pushed all levels of government to take on debt and give stimulus to the market and that has resulted in a massive ballooning of debt in China to fund this 7+% growth. Since the GFC, year after year, economists, investors, traders ad analysts of all persuasions have pointed at China and said it is unsustainable. Somehow China never imploded or popped or collapsed. All those ghost cities built in the middle of nowhere with speculation money? No problem. All that re-hypothecated collateral minerals that went missing? No problem. All those companies that started going sour and failed to pay their bonds? Government intervention has saved the day. If you had bet on China to unravel in the last few years, you would have lost money on all those bets.  It would’ve been hard losses to take too, because rationally speaking, China had every reason to come unstuck. The proof was in the pudding, and the pudding’s been magic so far.

Now, there are signs the magic pudding isn’t going to hold up. I don’t know how China is going to kick the can down the road next time, but they may yet have a way of doing so. After all, one of the interesting aspects of the great recession has been the way things just keep going on in spite of the numbers. If China can’t kick the can down the road, this is going to be it for the 23 long years of economic growth in Australia. The cracks are already showing up in commodity prices. Iron ore – the biggest corollary to the health of Chinese industry has sunk to a five year low. This is going to hit our export figures. Falling commodity prices should bring the value of Australian Dollar down. Things are about to get very bumpy.

I can report to you that the money-go-around in Sydney has stopped to a snail’s pace. There are a lot of companies sitting on unpaid bills, the companies themselves waiting to receive payment to pay those bills. I have to say it hasn’t been this slow since August 2007, which was exactly the peak of the market before the GFC. I’d start selling shares this month if I had any to sell.


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China’s Looking Scary

Bubble? What Bubble?

It’s been a strange year in the world of market-watching. There are as usual, quite a number of ructions that make you wonder about the health of markets or in fact there is any sanity prevailing in markets. Crimea has grabbed headlines and so Australian stocks have followed the lead of the world, up and down, with the news cycle surrounding Ukraine and its coup. Ukraine of course is a basket case waiting to blow up, but it’s not like it’s even in the top 30 economies of the world. Even if there was a full economic meltdown in the guise of a default, there wouldn’t really be too much of a problem short of a shooting war breaking out.

China on the other hand is the world’s second largest economy, warts and all. And there are a lot of warts and other nasty lesions that mark the Chinese economy, one of which is the size of the debt it has created since the GFC. If you tally it up, it is larger than the combined debt of the USA, the Euro zone and Japan combined. The criticism has been that much of this debt has been pumped into general construction companies that have built ghost cities of luxury apartments while other parts have gone into a shadow banking system that has blown this easy credit on god-only-knows-what. Of course, this being China, the debts were collateralised with commodities such as copper, rubber, nickel, iron ore silver and of course gold. Which is all well and good if the commodities are going up, but they have instead been falling in value for some months now. This, has logically led to loans being called in, bank runs on minor banks and a general drying up of liquidity.

As I mentioned last week, the Chinese market has experienced a number of defaults this month – something unheard of prior to this leadership group coming to power – and all of a sudden things are turning a little hairy over there.

In that light I’d like to share a few links so you can have think about what this might mean. The first link is here:

After Hong Kong, the UK takes the lead by far. (As a note, banks in several countries, particularly in emerging markets like Russia or Latin America, aren’t listed, because they don’t report to the Bank for International Settlements):

Some UK banks’ long historical ties with China—HSBC and Standard Chartered, in particular, have roots in Hong Kong—mean they have been lending there for decades, though in recent years, loans to Chinese companies and banks have also grown steadily. Neither will be a good thing if analysts’ worst fears about China come to pass.

Right. Of course Australia is on that list with US$28.7billion which is about AUD$ 30bn right now.

Keep that in mind as we have a quick look at what the AFR is saying about Australian banks, courtesy of Pleiades who gave me the heads up as I was telling him about whats reported as going on in China.

A study by funds management giant AMP Capital presented to the ­superannuation funds at an industry conference this week, showed that a typical fund has more than 12 per cent of total assets invested in the banks, but banks accounted for a quarter of their investment risk.

Industry averages suggest a fund’s value shouldn’t move by more than 8 per cent in a given year. However, more than a quarter of that volatility risk in Australian funds is driven by the banking sector, demonstrating just how sensitive our retirement savings are in the continued health of the big lenders.

“The system is quite exposed to these four banks. From an equity point of view, the weight in financials in ­Australia is at a peak,” AMP Capital’s head of credit markets Jeff Brunton told an audience at the CMSF conference in Queensland this week.

At 30 per cent, Australian’s index exposure to the banks is the highest its ever been – doubling since 1993.

Worryingly, in United States, Japan, Germany and United Kingdom, the weighting of banks had fallen sharply from their peaks.

Yes. That means, it’s a bit like we’ve put all our eggs into the property basket twice. Once through taking out huge mortgages in a property Bubble, but also through our superannuation accounts that own dirty big lots of banking shares which are exposed to real estate., and are also over-priced The scary bit is over here:

AMP also presented controversial findings about the ability of banks to withstand stress. The banks and ­the prudential regulator had conducted stress tests – based on a 40 per cent fall in property values and 4 per cent ­foreclosure costs – which AMP ­replicated. “We get the same number – $17 billion of losses,” Mr Brunton said.

“That’s nothing. That’s why the banks and APRA say our system is safe.

“But the insight we put on the table is that the remaining mortgages, those who haven’t defaulted, will actually be at a very different loan-to-value point than when they took out their ­mortgages. More than half of ­Australians will be in negative equity and a lot of us in significant ­negative equity.

So it seems there’s AUD $17bn sitting there on the ledger as potential losses that’s separate to the AUD $30billion mentioned above, but linked together by the health of the Chinese economy. All this robust property valuations and auction prices and what have you are sitting on a bubble that is the Chinese economy. When the music stops, there are going to be tears.

Just how exactly is China doing? Here’s a glimpse:

Over the past month, we have explained in detail not only how the Chinese credit collapse and massive carry unwind will look like in theory, but shown various instances how, in practice, the world’s greatest debt bubble is starting to burst, resulting not only in the first ever corporate default but also in the bursting of the associated biggest ever housing bubble. One thing we have not commented on was how actual trade pathways – far more critical to offshore counterparts than merely credit tremors within the mainland – would be impacted once the nascent liquidity crisis spread.

Today, we find the answer courtesy of the WSJ which reports that for the first time in the current Chinese liquidity crunch, Chinese importers, for now just those of soybeans and rubber but soon most other products, “are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world’s second-biggest economy.”

While apologists of China’s collapse have been quick to point out that China’s credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private – corporate – debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as the offshore supply chain is Ice 9’ed.

The fact is, it’s just starting. The way it’s going is that the importers of commodities have run out of liquidity so they’re cancelling and tearing up contracts.  The unsold glut of commodities is leading to the collapse in the price of commodities. Because the shadow banking system uses commodities as collateral, a lot of loans are going to get called in as result of this collapse. it’s pretty much as people have predicted the collapse of the Chinese credit bubble. When this collapse moves on to property, there’s going to be knock on effects to Australia and suddenly that $47bn problem is going to come home to roost. If that doesn’t scare you, its probably because you don’t have a mortgage and you don’t own bank shares.

Just watching the share price movements this week, it appears that twice this week, people bought in hoping for a stimulus package to be announced by the communist party bosses. Except they have made it explicit that they won’t be doing any more stimulus packages because it only kicks the can down the road. That means China will test a market downturn and all the people buying up shares this week were exercising what can only be described as irrational exuberance.

That’s really not great news.

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Senseless In Davos

Where Rhetoric Goes To Die (But Where Bastardry Thrives)

This forum going on in Davos is a bit of a joke. A few days ago Shinzo Abe got up and said his visits to the Yasukuni Shrine was to pray for world peace. If you overlook how disingenuous this is, sure, why not? Except all it did was provoke storm of protests form the governments of China and South Korea who like it or not have made it an industry to complain about the alleged re-militarisation of Japan. And so the Chinese have been on a diplomatic offensive everywhere telling every world newspaper what a threat Japan is to world peace. Which of course taken in a vacuum might look that way but as with Shinzo Abe and his disingenuous-ness, the Chinese are building Aircraft carriers and unilaterally declaring  airzones in their favour.

Let’s be bluntly honest. The Chinese themselves are the biggest threats to world peace full stop, without comparing them to Japan. So if you overlook that glaring fact, then maybe Shinzo Abe’s visit to a war memorial looks provocative. I’m not sure the Chinese sales pitch is working, even in Africa. After all, it’s not like Japan’s been to any kind of conflict, let alone war for nearing on 70years while China’s happily had war action in every decade since World War II ended. The Korean War, the land war with the USSR, The invasion of Vietnam in the 70s not to mention the various oppressive things they are doing to their ethic populations in Tibet, Inner Mongolia, Manchuria and to the Uighurs.

So there’s that. But the clincher might be the fact that for any person complaining about the Yasukuni Shrine housing Class ‘A’ war criminals from the Tokyo Tribunals, nobody can name all the names. They just say, “Class ‘A’ War Criminals” like there’s some universal understanding of what that means. Most of them wouldn’t know who Justice Webb was, nor would they understand what Keenan and Pal had to say after the trial about the Tokyo Trials.

Be that as it may, we’re going to keep hearing about these visits. Here’s the vexing thing. Japanese Prime Ministers since Junichiro Koizumi have eschewed going to the Yasukuni Shrine. That’s dating back to 2006 or so. Since then, the first go around for Shinzo Abe, Yasuo Fukuda, Taro Aso, Yukio Hatoyama, and Naoto Kan, have come and gone without attending the Shrine and you can’t say they got any slack from the Chinese or the South Koreans. It’s been a noisy chorus of complaint regardless. Its not surprising that Shinzo Abe decided he may as well serve himself and his constituency by visiting if there wasn’t going to be any merit in not going. The complaining – for all its pseudo-historic self-righteous legitimisation – is gratuitous.

Tony Abbott – Asshole Representative

By now it is clear that Tony Abbott’s essential style is ‘thrower of artless haymakers’. This week he got up in Davos to try and sheet home the blame of the Australian Government debt to the ALP and threw their record under the bus. It doesn’t matter that it’s not the done thing when you represent your country. It doesn’t stop him from behaving like a prat. It doesn’t matter that his characterisation of that recent history is totally at odds with how the rest of the world understood the GFC or how much they would like to swap their problems for ours. It doesn’t matter that he comes over like a jerk – he’s used to that, he doesn’t even notice any more – and that it subtracts from the sum total of Australia’s credibility for voting him in. That’s right. He really doesn’t care. If he went there as an individual to speak bullshit, that just reflects badly on him. Unfortunately as Prime Minister, his Bullshit speak makes us all look incredibly stupid.

Yet, he’s our man in Davos. The more I think about it, I think our political class has collectively flown into the twilight zone of good sense or simply into a post-modern simulacrum of politics and not real politics at all. Pleaides was threatening to destroy his computer in furious protest at Tony Abbott’s choice of general Cosgrove as the next Governor General, but really Tony Abbott’s just meeting expectations of being the pits. And just as the whole thing reflects badly on Australia, it reflects badly on the Coalition that they think this is their man to lead the nation. So far, he’s a bust.

It was reported Tony Abbott met with Shinzo Abe, and they didn’t discuss whaling as an issue. This upset the Greens back home. After all, how could Tony Abbott not bring up the most symbolic issue that exists between Australia and Japan? Quite easily it seems. Tony Abbot claims they mostly talked about the TPP, trade and security. In the most ironic of ways, it actually makes sense. Why bring up whaling and make thing unpleasant? That being said, I find it incredibly hard to imagine Tony Abbott bringing up a topic that is not close to his heart at all and arguing a robust case on its behalf. Whatever he is, he is not that good a politician.

Dissing Jakarta From Afar

The even more peculiar thing about the Abbott Government so far is how it has mishandled the relationship with Indonesia so badly, to the point where we ought not be surprised should a shooting engagement erupt on the high seas between our navies.

The worst provocation would have been this business of sending back the asylum seekers in boats. To do this, the Australian Navy had to sail into Indonesian waters without permission. Immigration Minister Scott Morrison fronted the media and claimed that the Australian Navy might have “inadvertently” entered Indonesian waters.  Now, I don’t know about you, but I don’t see how that makes our navy look good when our Immigration Minister uses being lost as an excuse for being somewhere where they probably should not have been.

Jakarta’s in a huff and they’re buying more military hardware. They’re buying F-16s fro America and 8 submarines from Russia. All because we provoked them with our navy, unilaterally sending back asylum seekers in boats; and in turn, this was because this government came to power on the stupid slogan “stop the boats” so they had to be seen to be doing it (otherwise they would be seen  to have broken a promise).

If you thought Shinzo Abe was a bit of a dummy incurring the complaints from China and South Korea for having visited the Yasukuni Shrine, he’s got nothing on Tony Abbott.

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Contrasting Styles

Reforms, The Chinese Way

Here’s an article about China needing reforms and here’s an article about India needing reforms. It’s interesting that they come up on the same day in the same way with similar problems.

China first.

Chinese officials did little to dispel some of the more extreme rumours, including that he was seriously ill, or that he was hit in the back with a chair hurled during a meeting that turned violent with a fellow ”princeling” – a term used to describe the close-knit network of sons and daughters of revolutionary heroes increasingly gaining influence and political capital in China. Again, no explanation was proffered.

China’s standing in the world now, combined with the lack of regular access to senior politicians, has meant the increasing horde of China-watchers tend to hang off every public utterance from the likes of Xi, trying to read between the lines, squinting for subtle messages in what is invariably tightly scripted party-speak.

Just this month, Xi’s visit to Shenzhen, in China’s south, drew close attention from state and international media. Shenzhen was a stop on Deng Xiaoping’s landmark southern tour in 1992 – the genesis of the catchcry ”to get rich is glorious” – and where he canvassed support for his platform of economic reform.

There’s a list of challenges this year for China, but basically there’s no guessing how this reform will be accomplished. The leadership and its processes are opaque to the point of obscure. Nobody knows how they will deal with tough issues that involve vested interests. It’s actually a deep mystery how they prioritise their issues.

This is in stark contrast to India:

”The current economic situation is difficult. The continuing crisis in the global economy … combined with some domestic constraints, has meant that our growth has also slowed down,” Dr Singh told the National Development Council, India’s major economic planning body that includes the leaders of all 28 states.

”Our first priority must be to reverse this slowdown. We cannot change the global economy, but we can do something about the domestic constraints which have contributed to the downturn.”

Dr Singh said the world’s largest democracy needed major economic reforms, and rapidly, to lift its poorest citizens from poverty.
An estimated 400 million Indians still live on less than a dollar a day.

”We must remember that we are still a low-income country. We need 20 years of rapid growth to bring it to middle-income level. The journey is long and requires hard work.”

India’s growth rate for the fiscal year ending in March is expected to be 5.7 to 5.9 per cent, the slowest since 2002-03.

There’s a democratically elected leader pointing to the problems with no veiled language that needs to be dissected and decoded. The article then goes on to a discussion about the need for a Goods and Services Tax.

I offer this up as interesting because with China you have an oligarchic state that will do what’s required from the top down without any insight into the debate while with India you have a state that spells out what needs to be done but must build a difficult consensus in order to get those things done.

If I were an investor, I’d be challenged by what is on offer here. On the one hand it’s high growth, multiple and high political risks with China, and relatively lower growth with comparatively lower political risk with India. Not to lowball China’s accomplishments so far, but the lack of transparency in China just scares the hell out of me. Equally, tales of vast inefficiencies, and red tape in India would brown me off from putting money there in a hurry.

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Quick Shot 01/Oct/2012

Mere Anarchy

I’m reading Woody Allen’s 2007 book ‘Mere Anarchy’. It’s mostly numb chuckles except page 42 where there is a tour de force of comedy writing.  The set up is that the narrator Mealworm is contacted by a Hollywood type to write a ‘novelizaion’ (I leave that ‘z’ in there with all its Americanism). After much self rationalisation that it is a worthy task ,and that he could ennoble the genre, Mealworm embarks on a sample passage.

The style he parodies is ‘In Cold Blood’ by Truman Capote. The movie he is given, is ‘The Three Stooges’. The ensuing passage is priceless.

Oakville Kansas, lies on a particularly desolate stretch across the central plains. … What’s left of it the area where farms once dotted the landscape is arid space now. At one time corn and wheat provided thriving livelihoods before agricultural subsidies had the opposite effect of enhancing prosperity.

The dilapidated Ford pulled up before a deserted farm house and three men emerged. Calmly and for no apparent reason the dark haired man took the nose of the bald man in his right hand and slowly twisted in a long counterclockwise circle.

And so the passage goes for a full page of gut-busting funniness, describing a typical Three Stooges sequence with the kind of high-toned literariness usually pitched for the high-brow-ed.

Living The Irony, Feeling The Irony

The Sydney Swans won a very Victorian championship. The Melbourne Storm won a very Sydney championship. The feeling on the Sydney streets at least are pretty surreal.

Speaking of football codes and surreal, there’s good old Alan Jones!

Alan Jones, And Dying Of Shame

There’s probably a longer note to be written about Freedom of Speech, but Annabel Crabbe’s done a good job of it today in the SMH. Alan Jones apologised for his rather gauche remarks about the late father of the PM.

He said the same kind of “black-humoured comments'” were similar to those made in the trenches of Gallipoli.

The radio host said he had to “man up” and admit he “got it wrong” for adding to the hurt of a grieving daughter by making the comments during a 58-minute speech at a Sydney University Liberal Club President’s dinner at the Rocks.

“There are days when you just have to concede and man up and say ‘you got it wrong,'” Mr Jones told reporters at 2GB headquarters this morning.

“And on this instance these are remarks which I should not have repeated. It was wrong to offer any impression that I might seem to diminish the grief that a daughter would feel for her father. I was taught by my father that if you are going to eat crow you should eat it while it’s hot and therefore I felt this matter should be addressed today.”

Notice how he invokes Gallipoli. Good heavens Mr. Jones, certainly you know no shame, for truly those men did not die of shame, but bullets in another time in another war in another place in the middle east. To invoke them in an apology to the Prime Minster after having made the worst-of-taste remarks shamelessly seems a bit ironic given the original tasteless remark about shame and death.

It’s a good thing he “manned up” and apologised as he did. Mr. Jones even invoked his father, saying his father taught him to eat humble pie while it was still warm. The gag I would have expected was that it was his father who as spinning in his grave for shame that his son would insult the Prime Minster in a most tasteless manner.

He then went on to say the horrible on-line people had said they wished his cancer would return and kill him and so, even he is a victim in all of this. Like… how? I’m inclined to say he brought the trolls upon himself and really, the vitriol was largely in proportion to the vitriol he’s been spreading across the air waves from his Bully pulpit microphone.

Still, an apology is an apology, no matter how qualified and caveat-ed. He is fortunate the Prime Minster is not Chinese or Korean, for we know no apology is sincere enough for them 🙂

Which brings me to this next bit…

Senkaku Island Waterfight

You gotta laugh. No, really, you do. The trouble in Senkaku Islands stems from China’s loss of face and actually losing a war with japan in 1895. it’s trying to say Japan shouldn’t have those islands – but that is at least 3 dynastic regimes ago, dating back to the Dowager Empress and the last Emperor. The argument from the People’s Republic of China, the one that deposed the Republic of China and the KMT (who deposed the Ching/Qing Dynasty) is that it belongs to them because it used to be China a long time ago – and even these claims are pretty tenuous.

Well, a lot of things used to be Monoglia as well, but you don’t see politicians in Ulan Bator demand that borders be returned to the best days of Genghis Khan. And, as with all these things, who cries for the Carthage and the Phoenicians?

As far as the USA is concerned, the Senkakus are part of the Okinawan archipelago and they’ve told the Chinese government that this is their understanding; which means if the Chinese try to occupy them it will invoke the US Japan Security Treaty. China has argued vociferously that it shouldn’t but, it’s really not for them to decide.

The protests in the wake of Japan ‘nationalising’ the Senkakus has been both elaborate, orchestrated and very vocal.  The ugly back story is that China is going to undergo one of its interesting Communist Party succession plans this month, and they’re trying to divert their population’s animosity to Japan (because let’s face it, it’s easy for them to keep lying). Japan for its part, nationalised it because if they didn’t, the chief right winger in residence and Governor of Tokyo Shintaro Ishihara was going to buy it for the City of Tokyo and administer it as Tokyo administers a whole bunch of small archipelagos in the Pacific. The subtext there is that Ishihara was going to build structures on the Senkakus like, a jetty and a lighthouse; and Prime Minster Noda forestalled those active plans by nationalising the islands with the full intent of doing nothing in particular with them.

Not that they understand these subtleties over in Beijing or … Taipei. Taiwan has it’s own election coming up; and it is helping the incumbent to look tough. So they sent a patrol boat out to the Senkakus and this led to a waterfight between Japanese and Taiwanese patrol boats. It’s laughable, really.





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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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News That’s Fit To Punt – 12/Mar/2012

All The Best Cowboys Have Their Eyes on China

The GFC story keeps spreading and spreading and the many headlines it has spawned are like the snake heads on Medusa’s head. This one comes from Pleiades. We all ought to be a bit more discerning about what the economic picture coming out of China looks like.  Of course it’s easier said than done and everybody has a fragmented picture of what this could mean.

The reality is that a part of China’s growth has been an illusion. Since 2008, China’s headline growth of 8-10 per cent has been driven by new lending averaging around 30-40 per cent of GDP. Given that (up to) 20-25 per cent of these loans may prove to be non-performing, amounting to losses of 6-10 per cent of GDP. If these losses are deducted, Chinese growth is much lower.

The China economic debate is focused on the alternatives of a soft or hard landing. Both scenarios assume a slowdown in growth and transition to a troubled maturity.

The case for the soft landing assumes that the investment and property bubbles are less serious than thought. Beijing has sufficient financial capacity to boost growth by loosening monetary policy and bank lending, while adjusting specific policies, such as lifting restrictions on housing sales to prop up prices. China is able to boost domestic consumption, replacing investment as the key driver of its economy. Excess capacity is gradually absorbed as the world economy recovers.

Growth comes down gradually, without causing social and political disruptions.

The case for the hard landing assumes the rapid and destructive unwinding of asset price bubbles and problems within the Chinese banking system. A poor external environment and losses on foreign investment exacerbates the problem. Growth collapses triggering massive social unrest and political tensions.

The end of a cycle of debt and investment driven growth is typically disruptive. Japan’s experience, which China has drawn on in shaping its economic model, is salutary. Japan grew by 10 per cent in the 1960s, 5 per cent in the 1970s, 4 per cent in the 1980s, and has remained stagnant since, adjusting to the deflation of its debt fuelled bubble.

A bit reductionist, but you get the picture. China’s taken on a whole heap of debt and shoved it into infrastructure that is not needed immediately in order to stimulate the economy. If and when those debts come home to roost, then China’s going to have a big credit crunch all of its own making. But let’s say for the moment that is abject pessimism. What are we looking at right now?

The latest SMH headline on China has this article saying:

“The point is to make sure there are smooth liquidity conditions that are supportive to growth, but not necessarily a very aggressive easing that would invite future inflation risks,” HSBC China economist, Sun Junwei, told Reuters.

In other words, a decision to ease monetary policy is not necessarily about having snuffed out inflation risks at all. Indeed, those risks start to loom larger barely six months from now, and grow even more intense when inflation is viewed as an expression of economic constraint – too little supply relative to demand – rather than expansion.

China has a shrinking labour force, mandated double digit wage hikes, an export sector losing its competitive cost advantage and an insatiable thirst for raw material imports.

“With China’s working-age population set to decline steadily from 2012 onward due to retirement, the notion that a minimum of 8 percent GDP growth is necessary to sustain full employment and preserve social stability is now outdated,” analysts at Nomura said in a note to clients.

It also means that inflation pressure will build at a much lower rate of growth going forward, a fact unlikely to be lost on China’s leadership, which has seen periods of high inflation often coincide with protests and social unrest.

That actually doesn’t sound as neutral as it is written. Reading it in the context of other articles, a picture emerges where China’s economy could actually stall, if not tank.

Coincidentally Skarp sent in this article which has this tidbit:

But sooner or later there has to be a reckoning. Australian real estate prices have grown out of line with the rest of the world and, more importantly, ahead of even the strong growth in Australian income.

If China has a medium-to-hard landing – and the China boom is not likely to extend past the next few years in its current form – the bloom will come off the Australian economy.

If people start losing their jobs, and are unable to pay their mortgages, it will start creating problems in Australia’s credit markets. That, in turn, could begin the process of finally rectifying the growing imbalance of debt to income in the Australian economy.

Yes, the writing’s on the wall. China probably can’t continue its boom in its current form, which means at some point it’s going to have to have some kind of landing – and knowing they’ve never tried one of these landings before it will likely be a hard one. Should that happen, Australia will be in for all sorts of fun and joy.

Now, it has to be said that whatever is going on right now is not some sustainable ‘new normal’. We’re effectively living in an insulated bubble but one that is destined to pop.

Japan, In The Headlights

Just before the last little bit in that link from Skarp, there’s a discussion on Japan I also want to touch upon briefly.

One other thing that has provided stability in Japan and solace for investors in Japanese bonds has been Japan’s consistent current account surplus. However beginning before, but obviously accelerating after the earthquake, tsunami and accident at Fukushima, Japan has seen its trade balance decline sharply. The reactor meltdowns and subsequent closure of the vast majority of nuclear plants has forced Japan to aggressively shift away from nuclear base load power. But that has meant it has had to pay a lot for LNG, oil and coal for its power generators.

Last year, Japan’s ran a full-year trade deficit for the first time since 1980. The just released data for January show that Japan also ran the largest single month full current account deficit (in unadjusted terms) since the oil shocks of the 1970’s. In addition preliminary data show Japan on track for another trade deficit in February, despite it being traditionally the strongest month for trade performance.

Now, one of the things that the market relies on for Japan is that it is a net saver because it runs a current account surplus – take that support away and the market’s sentiment on Japanese debt sustainability could change very quickly and very aggressively.

We think a Japanese crisis is going to happen – there are some clear warning signs. And we think it will happen sooner rather than later. At present, the market view is that a Japanese crisis as an impossibility because there is so much committed capital that relies on stability that there is a cognitive bias and willful blindness to the risk that it will blow up in their faces.

If that Japanese Crisis mentioned towards the end happens, it will trigger big problems for China, because China holds a lot of Japanese bonds as well.  So all the things people are living in fear of about China, will be on the cards. So the question about Japan is when is this going to happen? Some people are saying 18 months but if Noda calls an election, it might be in 6months that the crisis will be in full bloom because basically, Noda doesn’t have a mandate to be raising the consumption tax and he knows it; but the electorate is dying to dispatch the DPJ, so all of this year’s policy agenda in Japan is looking unstable, if not outright impossible.

If they’re forced to the polls and it produces another LDP led government, things could get really bad up north.

A year on from the Tsunami and Fukushima nuclear disaster, we’re looking at a serious maelstrom brewing.

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