Federal Government

BUBBLES BURST: China confronts hard landing while Australia obliviously whistles a happy tune

While too many Liberals have been excited about and distracted by the “misogynist nutjobs” as PM Gillard eloquently described the likes of online poo-players Larry Pickering and Stephen Mayne who have incessantly repeated increasingly silly conspiracy theories suggesting she is (somehow) a crook who embezzles and/or appoints her accomplices to the Federal Court, there is a very serious issue on which they should focus: Australia’s exposure to China’s bubble economy.

China is Australia’s biggest trading partner. As we’ll see, tens of billions of dollars have been invested in Australia – principally in mining – from China.

Disturbingly, inventories of unsold goods in China have reached dizzying heights.

HOUSE OF CARDS
In an important piece that highlights the serious potential problems facing Australian businesses from mining to tourism to export education to property, the NY Times reports on an unprecedented “glut (in China) of everything from steel and household appliances to cars and apartments.”

The notionally communist control freaks of Beijing are desperate to cover it all up too, hiding or fudging key economic data to disguise the bleakness of the situation.

But as the excellent SBS Dateline doco on China’s “Ghost Cities” showed, while you fiddle with stats, it’s hard to hide twenty-thousand apartment developments with no-one in them and empty shopping centres bigger than Chadstone. It claimed there are 64 million empty apartments in China.

The Times explains there are problems across the board in our biggest trading partner:

Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running. Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.

IT MAKES WALL STREET LOOK A SHINING CITY OF ETHICS
Not far behind China’s straining manufacturing sector are its banks, riddled with notorious corruption, which were pressured by Beijing when the GFC hit to lend more aggressively.

Banks’ non-performing loan data is rising but is widely believed to be massively under-disclosed. One of its biggest banks, the Bank of China reported an increase in “overdue loans” of 17% in the first half of this year.

If China sneezes, we are definitely going to catch cold.

Many of the dodgy loans have been directed to local government for infrastructure spending, only some of which was necessary or useful. Corrupt decision-making drove many infrastructure investment decisions. The BBC reports:

Last year, Beijing said that local governments had piled up 10.7tn yuan ($1.6tn) in debt, or the equivalent of 25% of China’s annual economic output.

“Some were good investments and some were bad investments, but fundamentally they should have been paid with by tax revenue and they were not credible commercial loans,” said (a business school academic) Mr Chovanec.

In one of the most insightful pieces we’ve seen on China (we’ve linked to it before and it’s really worth re-reading to remind ourselves what kind of trouble Australia is exposed to through our currently biggest trading partner) written by canny investor John Hempton on the Bronte Capital blog, he provocatively but persuasively argues that China is the biggest kleptocracy the world has ever known.

THE WORLD’S GREATEST KLEPTOCRACY
A summary of his argument (worth reading in full):

■ The savings rate in China is abnormally high, driven by the one-child policy;

■ The options for investing those savings for most of the population are extremely limited – mostly bank deposits;

■ The bank deposit market is rigged so that deposit rates were consistently below the inflation rate;

■ That repressed interest rates are mainly used to subsidise “staggeringly unprofitable” state owned enterprises; and that

■ This has funded the widespread looting of State Owned Enterprises by party officials.

It’s why the offspring of high-rank Communist Party officials are driving Ferraris, picking up Harvard degrees and strutting around Shanghai wearing minks like pimps.

History teaches us that bubbles always burst but also that great outrages tend not to last for long.

AUSTRALIA NEEDS TO GROW UP ABOUT CHINA
The fear of this corrupt bubble exploding is as big an issue as Australia faces. You won’t catch many politicians talking about it. Those who do, those who suggest Australia’s apparently endless mining boom might be over get piled on like a primary school “stack’s on” contest.

It doesn’t suit the government to talk candidly and realistically about these issues, nearly high-fiving itself into a Whirling Dervish frenzy with probably temporary poll numbers suggesting they’re recovering.

And it seems the Opposition isn’t much interested in focusing on the single biggest threat to our economy either, hoping it can continue its charmed run to Treasury Benches glory by glossing over how they’ll pay for some genuinely financially outlandish promises and without addressing the serious issues confronting us. Talking up the storm-clouds on our horizon doesn’t suit its narrative.

For weeks, Liberal frenemies have been desperately talking up non-issues about PM Gillard in their (probably sincere) attempt to help Tony Abbott. On this they have been about as useful to the Liberal cause as the 911 terrorists were to the good name of Islam.

If China sneezes, we are going to catch cold. But no-one wants to talk about it.

“Staggeringly unprofitable,” often corrupt Chinese state-owned enterprises have poured nearly $50 billion of investment into Australia in the past five years

A Fairfax columnist, oblivious to the dangers of it all, enthusiastically cited the data on how dependent many sectors of the Australian economy has become on an unsustainable situation:

Of the 116 deals involving China in the past six years, 92 of them were made by 45 state-owned enterprises.

Based on transaction value, 95 per cent of Chinese investment into Australia in the same period came through SOEs, according to a recent joint study by consulting firm KPMG and the University of Sydney.

Chinese SOEs have invested nearly $50 billion in Australia in the past five years, with almost all of it in the sensitive sectors of mining and energy. The acceleration has been marked – total Chinese investment in 2007 was just $1.5 billion.

The columnist complained that essentially both sides of Australian politics have been very unenthusiastic about foreign investments from what John Hempton describes as China’s “staggeringly unprofitable” and therefore unsustainable state-owned enterprises. Even that lack of enthusiasm has permitted tens of billions to flood in, pushing up the Australian dollar, causing an asset price boom in the resources space that has only started to recede this year.

At least Tony Abbott made a point of being very explicit about discouraging SOE investment in Australia while visiting China, a risky but candid and principled approach.

Despite unwelcome distractions from his own well-meaning but ultimately self-destructive Taliban stirrers and occasional polls that show the Coalition’s 2PP lead is shrinking as the election gets closer, Abbott will probably win next year’s election handily.

It’s certainly interesting to note the gap between the NT polling days prior to their little election (120,000 voters electing 25 MPs, all paid at least $130K per annum), there was a shift of at least four percentage points away from Labor as voters contemplated giving the nation’s apparently best (according to Nats Senate Leader Barnaby Joyce) Labor leader another four years. Voters – many spooked by the prospect of deep public service cuts – put down their Darwin stubbies, had a quiet and thoughtful burp and said “Nah” to Labor.

The NT election doesn’t cut for much other than reminding us how outrageously over-governed Australia allows itself to be. But we suspect Abbott will survive the next trying twelve months (even with the urbane France Telecom share-owning Malcolm Turnbull breathing down his neck whispering in colleagues’ ears about polls) and go on to become the next PM.

Much of Abbott’s success in office will be measured by the federal government’s strategy for coping with the undoubtedly looming crisis in our biggest and fastest-growing trading partner. And while there’s much noise from both sides of politics in attacking each other as crooks or sexists, we don’t hear much at all about what we can do collectively to deal with our biggest source of growth hitting the Great Wall of China at a million miles an hour. It’s time we did.

© 2012 VEXNEWS © 2013.