Domainfax: Chinese booming, no recession!

If the Sykesnado is not damage enough to your fortunes try a bit of Gareth Hutchens with five reasons why you should buck up and spend:

Take oil prices. Brent crude is trading near its lowest level in more than 12 years…But lower oil prices are usually a good thing, aren’t they? The cheaper the fuel, the cheaper the cost of the production. Extremely low oil prices ought to encourage global growth. And global growth is what we need right now.

With respect, why falling oil prices have so far failed to trigger a spending response in oil consuming nations is one of the hottest topics going around in economics. It appears to be because of demographics, poor income growth and over-indebtedness. There is no reason to think that that is about to change given these inhibitors are structural.

The US finally lifted interest rates on December 16, to a target band of 0.25-0.5 per cent, after seven years of rock-bottom rates.

It’s a good thing to see US rates rising from such a low position, isn’t it? It means the US Federal Reserve thinks the economy has improved to the point where it can start thinking delicately about inflation.

I would have thought we have our answer to that in markets. Rock-bottom rates over-inflated asset prices, ipso facto rising rates will do the opposite.

This week the IMF cut its growth projections for the global economy for 2016 and 2017.

…But it’s not as bad as it sounds.

The IMF revisions still show global growth of 3.4 per cent in 2016 (down from 3.6 per cent in October) and 3.6 per cent in 2017 (down from 3.8 per cent in October).

Global growth will be the same this year as last, at least until markets sink it. Looking to the IMF is the ultimate trailing indicator!

…analysts at Capital Economics think the recent plunge in global stock markets – which suggests investors expect the global economy is heading for recession – isn’t justified by economic developments.

“Despite the prevailing gloom about the world economy, we think global growth is likely to pick up from 2.5 per cent last year to around 3 per cent in both 2016 and 2017, using our own estimates for China,” they wrote to clients this week.

“Growth in the US is likely to be little changed this year, while it will probably slow a little in the euro-zone. However, we expect growth in China to rebound and some other emerging economies to stabilise as commodity prices recover.”

Capital Economics has been calling for a China recovery all of 2015 as it has deteriorated. It hasn’t come and isn’t. They’ve been even worse on commodity prices, which they do not appear to understand.

Of course, the thing we should be concerned about is the global build-up of debt. The world is burdened by $US200 trillion in debt that will unlikely get paid back.

With so much debt, and with global interest rates at such low levels, governments and central banks will have little firepower to deal with a major economic shock.

Thankfully we still have time to prepare for such an event.

What, by taking on more debt?

Gareth, holding a pen is not a reason to write an article. If you want to do so then:

• first, do your research and provide hard data;
• second, rely on sources that are leading events not denying them;
• third, cast a wider net to sources beyond the obvious and do not simply repeat conventional wisdoms.

But Mr Hutchens pales next to the “journalism” on offer from Domain itself:

Australian property developers are refusing to be panicked by reports that China is tightening controls over the flow of investment funds overseas.

They insist it’s merely a short-term market adjustment that will do nothing to cut the record levels of Chinese money coming into the country – especially when our falling dollar and volatile sharemarkets both here and in China mean they can levy even more value from Australian residential property.

“The restrictions are just a short-term fluctuation which is the way the Chinese manage their cash flows in and out of the country,” says Tony Crabb, national head of research at agency Savills International. “It won’t be a structural change at all.

Hmmm, perhaps. But what about the falling yuan? There is another side to the trade after all:

The AUD/CNY exchange rate has been oscillating from 4% to 7% rises for the past six months. It’s risen more than that over some other periods in recent years, but it’s at a level we’d expect to form a natural bottom. Given I see the AUD continuing to fall I don’t see the yuan suddenly cratering in AUD terms but the one way trade of property getting cheaper for yuan holders is also clearly over and forex now represents a headwind not tailwind.

As for how long it will last, several years at least. We are seeing a progressive tightening across all sorts of capital flight channels over months and years. And here’s the rub. The tightening measures will very likely continue to fail, yes, meaning that the yuan will continue to fall, meaning that the tightening will continue. Big money will always be able to get in and out (unless we hit a genuine crisis) but smaller and illicit money will increasingly come under pressure and that is the bid that matters most to existing Australian property prices. Transparent new property sales are always welcome.

Rick Butler, CBRE senior managing director of capital markets and international investments, says there has been no slowdown in Chinese investment in Australian property, and no signs of any to come.

“We believe it’s only affecting the special visa people with China hoping to shut that end down a bit, the people who put $5 million in or taking loans out of Hong Kong,” he says. “We’ve found the people who want to get money out can get it out in a single moment.”

That’s right, those buying existing property. And no article of its kind would be complete without this:

That concurs with the findings of Simon Henry, co-founder of Juwai.com, a website that lists homes around the world for Chinese buyers. “We haven’t seen any impact on Chinese property views from the reported tightening of capital controls this week,” he says.

“Inquiries via Juwai.com and property viewing have continued apace, with only normal daily variations. In fact, on Wednesday this week, they were 10 per cent higher than they were on Monday.

Is that the time frame that matters to property investors? When reading Domainfax these days, one should never overlook the old saying that if you want to get really rich then tell lies to people that want to hear them.