Blundell-Wignall warns on China bubble


From the AFR, Australian economist Adrian Blundell-Wignall, special advisor to the OECD’s Secretary-General on Financial Markets, and one smart cookie:

“What people are doing when you have zero interest rates around the world is they go into higher risk assets and at the moment it’s basically corporate debt in Asia. There has been a huge super highway of money flowing into emerging market credit because it has got much higher yield. The question is whether this super highway is a dual carriageway.”

…“Things are fine at the moment, but when people try to get out of it, you get big liquidity problems,” he said.

…“Australia’s in an unfortunate situation, in that we run our country tolerably well and we didn’t need to get into this zero interest rate business, because we never had the big financial banking bust that everyone else did,” Mr Blundell-Wignall said.

“But nevertheless we’ve been sucked kicking and screaming into having lower rates then we would rather have because everyone else has been doing it.”

The sooner Australia developed sustainable, non-mining growth engines the better, he said.

Public-private partnership investment in infrastructure, including green energy generation, was part of the answer, he said. Projects could be funded using financial instruments that were attractive to long-term investors such as superannuation funds and insurance companies.

Exactly right. There is one caveat. You have to choose your infrastructure projects carefully. Infrastructure bonds are a confused entity that exist somewhere between public and private designation. They may appear to be yoked (and backed) by specific projects but if the project turns uneconomic then they quickly trade as government guaranteed liabilities.

It’s all very well taking on more debt when the world wants to give it to you for nothing but, as is always the case, if you don’t spend it wisely and productively, that debt can become a public liability overnight when the traffic flows out again.

The Abbott government’s roads agenda needs a dose of this reality.

David Llewellyn-Smith
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  1. Public-private partnership investment in infrastructure, including green energy generation, was part of the answer

    Well that ain’t gonna happen if Dick and Tony get their way. Lets be thankful for Clive.

    • Hugh,

      All those two articles talk about the price of houses in China going down.

      Price is always interesting, but housing is about shelter and proximity for people. How is China doing in this regard? What kind of house does the average (or median) Chinese person have? How does their shelter compare to ours?

      • The average Chinese lives in squalor while the rich own several empty apartments. There is no comparison. House prices going down signal the end of China’s private credit growth engine.

      • The average Chinese lives in squalor

        From my point of view this is the Chinese housing problem. Not price going down.

      • Re: What kind of house does the average (or median) Chinese person have?

        The following video is from Hong Kong – a typical working family flat. I know it’s different to China yet I think it’s related to the question asked.

        Warning: You may get hungry during/after watching this video.

      • The average Chinese lives in squalor

        Dude, have you ever been to China? It’s not Africa ffs.

  2. General Disarray

    And that’s why further rate cuts are a terrible idea. If we’re being forced into a situation because of another countries actions then it’s time to get creative and play dirty if necessary. It’s crazy to follow the same monetary path that was largely responsible for the woes of the countries we’re trying to “compete” with.

    • Yup. Imagine what we could build with a hundred billion printed dollars or two. Intermodal freight infrastructure to regional centres (think Mildura, Bendigo, Toowoomba, etc.) that is the envy of most of the world (up there with the US), with access leased to on-rail providers on a 50-year RoI basis. Run a gas pipeline alongside the rail corridor as well and you have cheap, home-grown and mostly clean energy to these regional centres. Run fibre optic lines on the pipeline while you’re at it and increase the available bandwidth to each town at least tenfold for negligible extra cost. Provide these services to the regional centres on the proviso that they ease their restrictive town planning processes.

      This would also use up a lot of the soon-to-be-unemployed gas workers in QLD, and all the engineering and trades talent (civil, structural, electrical and mechanical) sent adrift at the end of the mining boom.

      Sadly such vision is lacking in our ‘open for business’ government. They don’t seem to understand that in order to foster business, you need to provide the right climate and soil for them to grow. And no, creating a tax-free zone in Northern Australia for your resource oligarch mates isn’t the same thing.

      • Strange Economics

        The govt , despite its pre-election policy, has stopped infrastructure Australia review of cost benefits, so these ideas won’t get up.
        The cost-benefit criteria is clear – how many drivers in marginal electorates a new pork barrel, uneconomic tollway in each major city will reach. Melbourne has a beauty – the East west with a benefit of 60c for each dollar spent. (ie a loss of 40c in the dollar in benefits).

    • Denis413MEMBER

      Yep, otherwise we really will turn out like Ireland (probably inevitable now anyway).

      1. Cheap credit
      2. Speculative housing
      3. Restricted supply response

      Australia is different though…

  3. Stephen Morris

    There is one caveat.

    In fact there are several caveats.

    1. Projects need to chosen carefully.

    2. Risk needs to be allocated efficiently. There is no point, for example, allocating uncontrollable traffic risk to private investors. It simply raises the cost of finance but produces no efficiency gains.

    3. Monopoly power and exploitation needs to be controlled – both in the short run and in the long run when facilities are being expanded. For example, the Victorian government is currently trying to claw back a fraction of the super-profit that went to the Transurban tax-farmers after taxpayers paid to upgrade Transurban’s access roads. Many of the road tolling tax farms have already had their terms renegotiated, privately without the prospect of competition.

    4. Financing efficiency needs to be maintained. The illiquidity of specific-risk public-private debt and equity adds an illiquidity premium for which there is no corresponding efficiency gain.

    5. Crypto-taxation needs to be monitored. It’s all very well saying that public-private partnerships are good investments for superannuation funds, but for politicians keen to avoid overt taxation it is a short step from there to requiring superannuation funds to investment in public-private partnerships. (Old-timers will recall the “30/20 Rule” which required qualifying superannuation funds to invest in government bonds. This is now being re-cast to require investment in private infrastructure projects.)

    Remember that the modern superannuation system was originally a voluntary system . . . until the politicians decided that it was so good they ought to make it compulsory!!

    – – – –

    For a full list, see Morris’s Laws of Privatisation.

    • if investors lose money in the provision of infrastructure, frankly, it is their problem

      nobody is forced to fund these things that dont turn out well

      most things have a price and the ownership will be transferred to somebody wiser

      if (for example) the Canadian pension funds choose to lose their shirts building roads in Australia, personally, I couldn’t care less.

      • innocent bystanderMEMBER

        “nobody is forced to fund these things that dont turn out well”

        not if the govt get their way ‘forcing’ super into infrastructure bonds/annuities

  4. Strange Economics

    “developed sustainable, non-mining growth engines the better”

    The RBA has identified only 1 brilliant unsustainable growth engine –
    – export new apartments and reselling all local houses to locals at higher and higher prices
    -and finally last resort buyers of foreign investors with cash. (before China property crash in Q3 and end of QE in Q3) .
    Better they raise interest rates use LVR to slow speculation and remove temporary residents buying existing property (ie as before K Rudds introduction of this in 2008).

  5. Australia never had the big banking bust not because our banks are safer, we never had the bust because China obligingly built a massive credit bubble, which helped our economy lower unemployment because we, Brazil and Canada supplied raw materials that went into Chinese ghost cities.

    • Yup, what was it that bloke from Societe Generale said last year? That Australia is a debt bubble leveraged on an even bigger debt bubble in China?