What if China cracks?

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Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

  1. I take one thing away from this article. The mining boom does more for sentiment than actual wealth creation for the country as the China storey is what the majority of the main stream think is stopping issues in Europe and US hitting us.

    Without the mining boom Australia’s true identity is revealed showing that we are just a serviced based economy which sells exiting property to each other for ever increasing prices.

  2. Firstly, I hope all those (you know who you are) that ‘wish’ for a China collapse and concomitant collapse of the resources boom in Australia read the worst case scenario. Be very careful what you wish for.

    “Australia’s terms of trade and expansionary monetary policy settings would push the Australian dollar significantly lower. Under this scenario, we would assume that any improvement to competitiveness to export exposed sectors (such as education and tourism) from the weaker currency will be offset by sharply weaker demand in export markets.”

    I have said this many times in response to ‘a low AUD and a China hard landing’ will be opportunity to boost our trade exposed sectors. My response to those claims: not likely, China hard landing and low AUD would indicate we have found ourselves in a global recessionary environment, at best. Glad to see someone else see’s it that way too.

    Anyway, go China, surprise all the doomsayers!

        • Double Lol. Clearly from the responses from the usual suspects, they do indeed know who they are!

          Dismal gloomsters all. 🙂

          • btw, I’m not a bull. I recognise the risks to Australia if China hard lands. some others don’t. they only think they’ll get cheap houses (oh yeah, just like the US housing market is flourishing…)

          • ” I recognise the risks to Australia if China hard lands. some others don’t. they only think they’ll get cheap houses (oh yeah, just like the US housing market is flourishing…)”

            Not sure whether that those two sentences go together.

            If you have good savings, a steady job and are buying a house to live in for the long-term (yes, yes and yes for me), then you can certainly get cheap houses in the US.

            I’m not barracking for a hard landing in China but I certainly think it’s a possible option and am preparing accordingly.

          • AB, transfer to the Oz economy – the circumstance may well suit you but not others. You may have a secure job, steady income but the worst case scenario predicts declining house prices, government inability to stimulate sufficiently, banks facing pressures (including lending into a falling market?), ABS unemployment around 11% (RM unemployment around ???, say 20%, who knows).

            Probably only good for public servants!

            Becomes one of those positive negative (whatever) feedback thingies!

            So again I say, Go China!!

    • agree 3d1k. the bears are barking up the wrong tree here hoping for a chinese hard landing that aint gunna happen. look at the expanding middle class and consumer base in China? will the bears ever learn?

          • Consumption growth isn’t going to help dirt exports from Australia though, which was mainly driven by Chinese investments in infrastructure and apartments (that they don’t need).
            .
            Are the Chinese suddenly going to import Commodores, Steel, Aluminium, Bonds underwear and vegemite from Australia when they start consuming? 🙂

          • if they switched from chopsticks to forks the boom in metal usage would be breath taking. Add several points to our GDP.

        • China’s consumption share to GDP fell from 44% in 2002 to only 34% in 2010.

          Yes, sadly GB doesn’t quite grasp that even though consumption might be growing in the mid-teens, if investment is growing in the mid-twenties, the consumption share of GDP is still shrinking.

          There are two ways for China to rebalance: Grow consumption at 30% plus, or slow investment to below 10%. Which do you think is the easier option GB?

          The implications of Chinese investment slowing from mid-20s to single digits are clear. Australia’s exports to China are almost exclusively used in the investment side of the Chinese economy. It matters little to Australia if the Chinese stop selling widgets to Europe and the US. What matters to Australia is if they stop building stuff.

          We have allowed ourselves to become utterly dependent on a single sector of a single country’s economy (albeit a big one). This dependency grows every day as the strong dollar systematically destroys trade-exposed sectors that are not cushioned from the currency by higher commodity prices.

          These are the facts as I see them. The MineBot, GB and others may disagree, but I see huge risks in allowing our economy to become so dependent on the Chinese construction sector.

          I am not “wishing” for a collapse of Chinese construction, but to me it seems almost inevitable. They have clearly over-borrowed, over-spent and over-built. Whether the Chinese authorities can magic away the debt is debatable. Perhaps they can, but even if they manage to paper over cracks there is likely to be an extended period when Chinese construction slows, and its increasingly likely this will coincide with new supply coming online in the iron ore markets.

          Over to you MineBot…

          • Cheers.

            I do recall you calling for a ‘thumping great recession’ in China last year – a continuation of the your anti-resources rhetoric.

            You are correct on one point: we are reliant on China. Thing that always amuses me with those the bemoan this is, given the global economy in which we find ourselves, just what else could we be reliant on?

            Exactly.

          • Now that the shoe is on the other foot, I am guessing you remain a China fanboi ONLY as long as there is Chinese demand for our dirt.
            .
            If Chinese demand falls and some other country, e.g. Burkino Faso start building infra they don’t need, then I guess you’ll become a Burkino Faso fanboi? By then, I suppose you wouldn’t care if China descended into a hell hole.
            .
            WHy am I not surprised by that? well, when you nominate Twiggy and Gina as your role models….

          • Not so Mav. I try never to lose sight of the human perspective.

            When Lorax triumphantly declared his desire for a thumping recession in China, I pointed out the selfishness of this position – wishing economic hardship and suffering on others for no other reason than to improve your own. Much like those breathlessly waiting for a housing collapse in Australia – why, so they can purchase cheaply – no concern whatsoever for homeowners adversely effected.

            I don’t desire pain and suffering on anyone.

          • given the global economy in which we find ourselves, just what else could we be reliant on?

            We shouldn’t allow ourselves to be reliant on any one sector or any one country. We should aim to maintain a diverse robust economy.

            That is the entire thrust of my argument.

            I have made this point countless times. Please incorporate it into your programming for the next beta release.

          • I too have argued for a robust economy but recognise that we are where we are. We cannot wave the magic wand and rejig the economic path we have taken. We have to make the best of what we have at this moment.

            If we are Lucky (and careful, prepared to have open intelligent non partisan debate, embrace methodologies that promote long-term outcomes etc) the boom will enable us to transition our economy to a position of generational robustness.

            We are where we are. We have the boom. We must make the most of it.

          • I don’t desire pain and suffering on anyone.

            But you’ve shown an extraordinary lack of sympathy for non-mining trade-exposed sectors for as long as I can remember.

          • the boom will enable us to transition our economy to a position of generational robustness.

            Many would argue that was the purpose of the RSPT. You know, the tax you protested against?

          • 1. I have always accepted that trade exposed sectors face challenges, as I accept that sectors within economies experience cycles. Does not mean I do not care for individuals adversely impacted and, unlike others, I certainly do not ‘desire’ their demise.

            2. RSPT was a poorly drafted shambles. We now have the MRRT. What is your point?

          • When Lorax triumphantly declared his desire for a thumping recession in China, I pointed out the selfishness of this position
            .
            Umm.. He is not calling for a thumping recession in China, He is calling for a “structural adjustment” in China, just as you do the same for the Aussie economy.
            .
            wishing economic hardship and suffering on others for no other reason than to improve your own.
            .
            All part of the structural adjustment, globalisation, … just like our trade exposed industries are being “structurally” adjusted.
            .
            The shoe is truly on the other foot 🙂

          • The MRRT is a p*ss weak compromise compared to the RSPT. Does “the mining sector doesn’t like it” equate to “poorly drafted”?

          • As my kind [mining] mentor concluded:

            “This bill was drafted BY miners, FOR miners”

            “I think the miners and their accountants outsmarted Gillard and Swan, and bamboozled them with mining jargon”

            “The miners in reality love it.”

            That says it all really.

        • noice one. +100. this whole emerging middle class/rising domestic consumption does not bear scrutiny. it takes decades to for economies to “mature” to a service based economy that piles on debt and flips houses. its a slow process!

    • China hard landing and low AUD would indicate we have found ourselves in a global recessionary environment, at best.

      In the late 90s China was backwater, the AUD was in the low 60s, the US was booming, and I don’t recall a recession in Australia.

      In the late 80s Japan was invincible, China was blip on the global economy, and the US was second rate.

      Things change radically every 10 years. There is no reason to believe a hard landing in the Chinese construction sector will lead to a global recession. It will most certainly lead to a recession in the Australian mining sector, and most probably the wider Australian economy, but it will save us from a much worse fate: The complete hollowing out of our economy.

      • Firstly, those historical anecdotes are sweet but I would suggest the world economy has dramatically changed since those timeframes. We have experienced a credit bubble of enormous proportions and rapid globalisation. A very different world, hyper-interconnected.

        If there is any recession in the broader Australian economy it will be primarily due to the end of the housing/credit boom. Of course mining would be in the doldrums, but would eventually reinvigorate. The economy is not being hollowed out at any faster pace than the natural restructuring outcome of globalisation. Chinese housing market may decline however also of great importance is the decline in exports to a world experiencing recessionary conditions – double whammy if you will.

        Read Megalogenis, now there’s a view I like.

        • Firstly, those historical anecdotes are sweet but I would suggest the world economy has dramatically changed since those timeframes.

          Precisely my point. It is highly likely that the world economy is completely different again in 2020. Who knows, China might be in the doldrums, and a re-structured Europe might be the new global growth engine?

          The economy is not being hollowed out at any faster pace than the natural restructuring outcome of globalisation

          Arrant nonsense. Hardly worth responding to. It is manifestly untrue.

          • Arrant nonsense. Not at all, happening almost everywhere around the globe, we are not unique in that regard.

          • Its clearly NOT happening in the US at the moment where manufacturing is recovering. Why? You figure it out MineBot.

            Again, you post such utter drivel its hardly worth responding to.

          • The US engaged in widespread offshoring of manufacturing processes, as did many other nations (Oz included) all contributing to your ‘hollowing’ out. An apparent uptick in manufacturing in the US does not a resurgence make.

          • Its clearly NOT happening in the US at the moment where manufacturing is recovering.

            seriously?

          • Yes seriously. Manufacturing is one of the largest contributors to the recent recovery in the US … and why wouldn’t it be when your currency has been debased by money printing for 3 years now.

          • Jumping jack flash

            Their manufacturing will improve in proportion to how closely they are copying the production strategies of the market leaders.

            Set the environment for productivity and the world will give you work. Look at what is happening with all the companies fleeing Australia.

            When companies in China begin to relocate to Australia and the US because it is cheaper then we’ll know the global recovery is underway.

  3. Diogenes the CynicMEMBER

    The Chinese whispers I am hearing put the chance of a hard landing much higher than 10% (30-40%) to me this is setting up a potential massive surprise to the current consensus that Australia is going to have a slow growth slow melt housing decline, a sharp recession with a nasty housing bust is just not on most Aussies’ radar. The recent spout of news over CNY points to a hard landing but has been all but ignored by the market.

    • This is my exact point in my first post. The mining boom does more for Australia sentiment wise than the actual wealth generated from the mining boom.

      I gurantee you that if the mainstream caught on that the mining boom was over and China was going bust, even if we continued to export the same amount of minerals and made the same money, positive sentimnet towards Australias growth would all but disapear. We would enter a negative feedback loop which woud tip us into recession within a month.

      • Arghh!!! Sorry to be a pendant, but it hurts my engineering brain when economists use the term “negative feedback loop” without understanding what it means. What you are referring to is called a “positive feedback loop”.

        If you’re going to borrow a term from another field at least learn how to use it properly.

        • Thanks for referring to me as an economist 😉

          From this day forward, now that I am a distinguished economist I will re write the definition of negative feedback loop.

          I will refer to it as the Georgie principle.

          Negative Feedback loop = when negative events lead to further negative events due to the heard mentality distilled in humans.

          Wait 12 hours and search wikipedia for the Georgie principle, I need other people to verify it so it can become accepted.

        • Agree. A lot of people wouldn’t know negative feedback actually means stabilizing the system.

          But “positive feedback loop” simply sounds too …err… positive.

          • “But “positive feedback loop” simply sounds too …err… positive.”

            Then just use the lay term: “vicious circle”.

            Using technical terms incorrectly to sound impressive is just lazy.

          • dumb_non_economist

            cyrusp,
            Technical terms quite often end up in everyday usage and not have the same meaning.
            Not everything revolves around engineering!

      • Jumping jack flash

        Georgie, I agree. In fact I would go so far as to say the mining boom is irrelevent.

        Most of the money goes back overseas because that is where the goods come from that are bought with the money we make from the boom.

        The capital works that are touted as the Saviour of Australia source the materials from overseas.

        The high wages paid to workers on these capital works are spent at JB Hifi on the latest imported trinkets. Or on cars that are manufactured overseas. Or given to the bank as debt repayment (future money already spent).

        The wages paid to the JB Hifi employees are also spent on these things.

        Very little stays in Australia.

  4. Boring Mav? This is boring!
    Quotes from Sam Walsh. [Pretty much the same speech for the last ten years.]

    -The iron ore market faces a period of volatility for perhaps the
    first six months of the year before stabilizing, Sam Walsh, chief executive officer of
    mining giant Rio Tinto PLC’s (RIO) iron ore division, said.
    The steel needs of China and other developing countries is expected to ensure demand
    for the commodity remains strong long term, he added. A further three billion people are
    likely to urbanize by the middle of the century, led by the continued growth of
    China’s economy, and followed by India and other parts of Asia and Africa–ensuring
    a robust need for iron ore to produce steel, said Walsh.

    “Iron ore prices are an enigma and a moving feast,” Walsh said, adding
    volatility was expected to continue for the next several months.

    A master of understatement is Mr Walsh.

    Another economists view.
    http://www.ted.com/talks/lang/en/martin_jacques_understanding_the_rise_of_china.html

    • See.. this is the disconnect between the 2 visions of future Chinese growth:
      .
      1. They will rebalance away from building stuff towards consumption
      OR
      2. A further x million people to urbanise (i.e. they will build more stuff).
      .
      Problem with the first vision is that it’ll not help the dirt exporters. i.e. this is a move away from globalisation and global demand towards internal consumption.
      .
      Problem with the second vision is that the number of Chinese living in cities ALREADY exceed the number of people living in rural areas.

      • The problem as I see it Mav is this:
        Quote:
        ” A further three billion people are
        likely to urbanize by the middle of the century”

        Well mate they’re not Chinese are they? 3 China’s could not achieve that.

        I posit that if if they aint Chinese then they are busted a**e broke and starving. Which means they are not in the position to pay for urbanisation or any thing else.

        • Even within China, some of the urbanisation is “forced” i.e. When farmers are evicted from their farm land (to be sold to developers who create new ghost cities) by corrupt provincial party officials, they get paid very little compensation. These farmers then have no choice other than to look for an “urban” job in the cities, mostly in construction sites!
          .
          Presto! Urbanisation!
          .
          Of course, China fanbois such as Pascoemeter tend to ignore this phenomenon, because it does not fit with their narrative of the Great Asian miracle and the 20 year mining boom.

          • Maybe the 20 yr boom is not implausible given that we are ten yrs into it now.
            An addendum to your forced urbanization point if I may.
            It [urbanization] still has to be paid for.
            As it stands, it is not paying for itself. (Which the apparatchiks will find out soon enough.)

  5. If your country is controlled by one bloke, and he wants urbanization, well guess what, you get urbanization irrespective if it’s commercial or not.
    Not sure how long in can last until the us blow up over the currency differential etc and he runs out of money?
    My thinking is just ride it until it starts to fall (mkts) then sell.
    Mkts can get things wrong for many many years until they correct so you can’t afford to be out too early.

      • The Intelligent Investor guys are all “doomsayers”. We can confidently ignore what they say, especially when they’re quoting that Pettis idiot, who clearly knows nothing.

          • I prefer “doomer” myself, which comes from the peak oil community.

            But my favourite doom word is “doomstead”.

        • Maybe be we can use the Craig James patented “Doomsters”. BTW, this was his tweet today:
          .
          Some dreadful reporting of the Greek bail-out, including wire services. Great efforts to do a deal but some just writing it all off!
          .
          🙂

      • I said the prospect of hard landing has been printed. Not saying hard landing is a given. I was very surprised to see this in the Age, where one usually gets to read Michael Pascoe telling us how the rest of the world, especially Europe is irrelevant to Australian economy and households (unless I have misunderstood his message). Hard landing may or may not happen but mainstream reader has been at least given the chance to know that such a possibility is being discussed by finance professionals somewhere.

        • If China cracks the Pascometer will immediately tell us that China is irrelevant to the Australian economy because of the magic of the exchange rate or some such nonsense.

        • Fair enough. Easy to forget when reading MB that there is prospect for anything other than a hard landing.

          • Of course there is, and there is also hope, remember. 🙂
            Maybe Pascoe and Gittins will even get the glory one day of stating that they were right all along. We all just have to wait and see what happens.
            Personally I find it crucial that media reports openly on what is going on in the world. I am sure a story on Kim Kardashian’s new hat would get many more clicks than the story on China’s economy so those not so keen on open reporting can still sleep well.

    • Meanwhile, another piece at Business Day says…

      HSBC concludes that China does not have an excessive investment problem.

      In fact, it needs to invest more, rather than less to catch up with the infrastructure standards of the developed countries.

      If HSBC is right, this would be good news for the Australian miners, which are some of the biggest beneficiaries of the construction boom in China.

      So the country with the highest investment share of GDP ever recorded, the country with the fastest rate of growth in investment ever recorded, actually needs to invest more!

      • I linked a while back to an Alphaville (?) article which argued much the same – given the magnitude of demographic shift, investment in fixed asset infrastructure on scale should be seen as just that, an ‘investment’ in the future of the nation. To be applauded, not denigrated.

        • Jesus MineBot. Is is possible to over-invest in your universe, or is all investment in fixed assets worthy of applause?

          The Irish and Spaniards “invested” is a sh*t load of houses in the mid-noughties. Should we applaud that?

          Florida condos: More applause?

          Sydney monorail: Standing ovation?

          Athens infrastructure for the 2004 Olympics: All good?

          FFS, you are becoming a parody of yourself.

          • That’s the spirit. After all there are very few similarities between the countries you nominate and China – a population of near 2 billion, transitioning to industrial economy manufacturer to the world.

          • You’ve completely lost me now. China has a population of 1.34 billion, many of whom will still be peasants a hundred years from now. How does that translate to “a population of near 2 billion, transitioning to industrial economy manufacturer to the world”?

            You’re starting to get lost in your own hyperbole.

          • Lol. Apologies. I am going a little hyperbowl. Feels like 2 billion when you’re in Shanghai or Beijing! 🙂

      • In fact, it needs to invest more, rather than less to catch up with the infrastructure standards of the developed countries.

        Ok . How about we exchange our infrastructure for theirs? Sydney’s Waratha train coaches for their bullet trains sounds just about fair.

        Anyway, from the other SMH article:

        Even if China builds the same number of houses, high-speed rail lines, roads, subways systems and airports as it did in 2011, that would produce zero investment growth.

  6. Brazil’s exports ORE over January were down 46% due to storms and heavy rain – think about that for a second people – when they come back online.

    People have decided that they no longer care about the Baltic dry index because someone put out a report saying the valemax super carriers would flood the carrying capacity – well, China wont let them in – so the Baltic is standing as a stark reminder of dry shipping demand – it is sitting at its lowest point EVER.

    It is way below where it went in the GFC – shipping glut or not, that is a sign of the Apocalypse if ever I have seen one.

    On top of this we have demand for EVERYTHING TO DO WITH CONSTRUCTION falling off a cliff – everything.

    South Africa, Brazil, Australia have all invested in insane levels of resource production – not JUST AUSTRALIA, so has China and India all over the world for their own production – including internally in China – this means that over the next 20 months the price is going to fall straight down a massive open pit – how on earth could it do otherwise ?

    Australia’s profit has no choice, none – absolutely no option – other than to be drastically as all this extra production comes online.

    If demand was to double or triple then prices might meet extra supply, if demand continues as is prices will be drastically slashed, (Miners may feel the wrath of the high Aussie on themselves and ironically be demanding the Government do something), and if demand falls or slides off a cliff – then prices will go into shock.

    So unless China decides to flood its economy with another trillion dollars and create a just as big bubble all over again – Australia is in for some serious cash flow reductions.

    The pipe line for Australia ALONE, is $600 billion in new investment….think about that number for a while people, then think about that happening in Brazil, Sth Africa, Africa, China……

    China is finished with the construction craze – continuing with it would literally destroy their economy.

    Worst case scenario for Australia looks completely over optimistic –