Tag Archives: China bubble

Say ‘Bye Bye Surplus’, Swanny

14 Mar

What happens when your business is massively reliant on one customer … and that customer stops needing as much of your product?

Ask Wayne Swan:

RBA Chart Pack - March 2012

Steel production not looking good. And total production growth gently sliding.

Why might that be?

RBA Chart Pack - March 2012

House prices topped out and rolling over. Floor space sold falling.

And fixed asset investments ground to a halt:

RBA Chart Pack - March 2012

Why is all this happening?

RBA Chart Pack - March 2012

The same old story, as seen throughout the Western world, now in China too.

When the “credit” (ie, debt) needed to keep blowing up a bubble slows and falls, the end is nigh.

And without all that debt-fuelled building activity to drive “GDP growth”?

RBA Chart Pack - March 2012

Say “bye bye” to that surplus fantasy, Swanny.

Oh yes, no doubt you will loudly trumpet a forecast surplus in the May budget.

But I for one am willing to bet you that, come end June 2013, there is not a snowflake’s chance in hell of your delivering one.

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China Stops Encouraging Foreign Investment

30 Dec

Riddle me this.

A “developing” nation of 1.3 billion people, a country that is supposedly the “engine of growth” for “a new era” in the world economy, stops encouraging foreign investment in its local car manufacturing industry.

Meanwhile, a “developed” nation of 22 million people, a country that survives on digging huge holes and selling its coking coal and iron ore for steel production to said “booming” nation, not only actively encourages foreign “investment in” (read “ownership of”) all its vital industries (agriculture, mining, manufacturing) … it gives $25 million to the world’s biggest (foreign) car maker to build a car it was going to build anyway … sends billions in “stimulus” overseas to buy carcinogenic pink batts and crappy flat screens … and all the while, its Treasurer constantly bleats his continued expectation of a “huge pipeline of investment” to salvage the nation’s savaged finances.

Tell me … which of these two nations’ politicians are best serving the long term interests of their own people?

From Bloomberg:

China will stop encouraging foreign investment in car manufacturing to allow for “healthy development” of a market that saw sales growth plummet to a tenth of last year’s pace.

The change ends seven years of foreign-investor benefits including reduced tariffs on imported plant equipment, said Jenny Gu, a senior market analyst at LMC Automotive in Shanghai…

SAIC Motor Corp., the nation’s largest listed automaker, rose 4.1 percent to 13.88 yuan in Shanghai trading today, it’s biggest gain in almost two weeks…

The nation’s automobile manufacturers association estimated that 2011 deliveries may grow by the least in 13 years as a rollback in policies aimed at encouraging buyers curtailed purchases.

So, China doesn’t want more cars produced? Because a dramatic fall in sales is another red flag that the “China bubble” is bursting?

Or, they just want to guard their own economic destiny?

In either conclusion, by contrast our own politicians are made to look exactly like the short-sighted, self-centred, traitorous sell-outs that they really are.

Pfffffffftttt! That’s The Sound Of The China Bubble Deflating

20 Dec

From Bloomberg:

China Local Debts Dwarf Official Data Prompting Too-Big-to-Complete Alarm

Click to enlarge

A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout.

Debt accumulated by companies financing local governments such as Tianjin, home to the New York lookalike project, is rising, a survey of Chinese-language bond prospectuses issued this year indicates. It also suggests the total owed by all such entities likely dwarfs the count by China’s national auditor and figures disclosed by banks.

Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.

There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt.

The fact so few of the companies have accumulated that much debt suggests a bigger problem, says Fraser Howie, the Singapore-based managing director of CLSA Asia-Pacific Markets who has written two books on China’s financial system.

“You should be more worried than you think,” he said of Bloomberg’s findings. “Certainly more worried than the banks will tell you.

“You know how this story ends — badly,” he said.

The findings suggest China is failing to curb borrowing that one central bank official has said will slow growth in the world’s second-largest economy if not controlled. With prices dropping in China’s real estate market, economists warn that local authorities won’t be able to repay their debt because of poor cash flow and falling revenue from land sales they rely on for much of their income.

Provinces and cities are going deeper into the red to finish projects, from the Manhattan on the east coast, to highways in northwestern Gansu and a stadium fronted by Olympic rings in Hunan, central China. Many were started as part of China’s stimulus program to beat the 2009 world recession. The financing companies accounted for almost half of the 10.7 trillion yuan in all local government debt tallied by the official audit.

The 231 borrowers whose public filings were reviewed by Bloomberg raised a combined 354.1 billion yuan by selling securities this year. They have credit lines from banks of at least 2.3 trillion yuan that have yet to be drawn down, the documents show.

And in other news from Bloomberg:

China’s November Home Prices Post Worst Performance This Year Amid Curbs

China’s home prices posted their worst performance this year with more than half of the 70 biggest cities monitored in November recording declines after the government reiterated plans to maintain property curbs.

New home prices dropped from the previous month in 49 of the cities monitored by the government, compared with 33 posting decreases in October, the national statistics bureau said in a statement on its website yesterday. Only five cities had gains in home prices, according to the statement.

“Home prices will fall further as the government’s tightening continues,” said Jinsong Du, a Hong Kong-based property analyst for Credit Suisse Group AG. “We’ll see more small developers file for bankruptcy or sell off their assets next year.”

Hmmmm. About Saxo Bank’s “Outrageous Prediction” #4 that we saw yesterday:

4 – AUSTRALIA GOES INTO RECESSION

The Chinese locomotive has been losing steam throughout 2011 as investment and real estate led growth becomes harder and harder to come by due to diminishing marginal returns. The effects of the slowing of the up-and-coming Asian giant ripple through Asia Pacific and push other countries into recession. If there ever was a country dependent on the well-being of China it is Australia with its heavy dependence on mining and natural resources. And as China’s demand for these goods weakens Australia is pushed into a recession, which is then exacerbated as the housing sector finally experiences its long overdue crash – a half decade after the rest of the developed world.

Not so outrageous, methinks.

Indeed, precisely what we have long been forewarning.

Saxo Bank’s “Outrageous Prediction”: Australia In Recession In 2012

19 Dec

h/t ZeroHedge.

Little old Australia gets guernsey #4 in Saxo Bank’s annual list of “Outrageous Predictions” (6.5Mb pdf download):

4 – AUSTRALIA GOES INTO RECESSION

The Chinese locomotive has been losing steam throughout 2011 as investment and real estate led growth becomes harder and harder to come by due to diminishing marginal returns. The effects of the slowing of the up-and-coming Asian giant ripple through Asia Pacific and push other countries into recession. If there ever was a country dependent on the well-being of China it is Australia with its heavy dependence on mining and natural resources. And as China’s demand for these goods weakens Australia is pushed into a recession, which is then exacerbated as the housing sector finally experiences its long overdue crash – a half decade after the rest of the developed world.

Given all the data and info we have seen here at barnabyisright.com over the past 12 months, I’d not call this prediction “outrageous” at all.

But then, we don’t ascribe to the popular groupthink here, do we.

For context, here is the preface to the 10 point “Outrageous Predictions” given by Saxo Bank chief economist, Steen Jakobsen (my emphasis added):

2012: The Perfect Storm

Generating this year’s Outrageous Predictions has been even more of a pleasure than usual, as it seems that never before have there been so many path uncertainties for the future, so we have had an infinite variety of scenarios to draw on. As usual, we try to keep at least a measure of consistency across the predictions by using a unifying theme. For this year, we settled on the theme for 2012: The Perfect Storm.

Saxo Bank’s yearly Outrageous Predictions report has always been one of our more popular publications, and understandably so, as it frees us and our readers from the constraints of the high probability events in the middle of the supposed bell curve of possibilities. But there are a few key points I need to underline about this publication:

The first is that we always focus on “fat tail” predictions, i.e. events that are unlikely to happen, but are perhaps far more likely than the market appreciates. Saxo Bank first launched this publication 10 years ago as an exercise in looking at events which, should they happen, would change the outlook and performance of markets. This was before the concept of Black Swans was popularised. Our publication was rather inspired by option theory and looking at the tail-risk – an event which based on odds or logic has a very small chance of happening, but somehow still happens far more often than any model is able to predict.

Consider volatility during the 2008 Financial Crisis which no model could even imagine. Or think about a natural disaster like the earthquake/tsunami that hit Fukushima. Disaster planning could supposedly handle a very substantial earthquake and Fukushima was supposedly located in a low risk zone. But instead, Japan suffered an earthquake of severity which seemed impossible in Japan’s geology, and the resultant tsunami wiped out back-up power. The unimaginable happened once again.

Saxo Bank’s yearly Outrageous Predictions are not intended as real predictions and certainly not as “forecasts” in any way. Rather, the Outrageous Predictions are 10 important events with under-recognised probabilities in our view. Should any of them come to pass, they would change the way we need to analyse, trade and report the markets.

It is also important to note that our Outrageous Predictions nearly always have a negative bias, which is in fact a natural antidote to how the market normally operates. Human beings have a tendency to think positively, which is a natural part of our motivation to get up and go to work every day and a vital part of our survival instinct. Day in and day out we think about building a better future based on a continuation of the present.

This is good for morale but does a poor job of preparing us for reality.

In that light, please do not let our Outrageous Predictions get you down. They have been prepared in the spirit of encouraging you to think outside the box and prepare for world-altering events. Thinking outside the box is rarely a comfortable exercise, but neither is dealing with an unpleasant surprise for which one has failed to prepare in any meaningful way.

Should one, two or three of our Outrageous Predictions come to pass, it would make 2012 a year of tremendous change. This may not necessarily be a negative thing either – and given the structure and uncertainties in the marketplace here at the end of 2011, we would suggest that even if none of our predictions come to pass, equally important and totally unanticipated events will. Sometimes we need to get to a new starting point before we can gain the right perspective. We hope 2012 will be the year  where we start on the long march towards re-establishing jobs, growth and confidence.

Maybe, just maybe, our Outrageous Predictions can at least lead to a discussion on how we can prevent some of them from happening. We would like nothing more than to be proven wrong on negative views, but only if they are replaced with something better than the current central bank and government-manipulated paradigm.

Jakobsen’s full list of “Outrageous Predictions” as follows”:

1 – THE STOCK OF APPLE INC PLUMMETS 50 PERCENT FROM 2011 HIGH

No sovereign or corporate empire has ever maintained its superior position for long because attacks mount and loyalty fades. Going into 2012 Apple will find itself faced with multiple competitors such as Google, Amazon, Microsoft/Nokia, and Samsung across its most innovative products, the iPhone and iPad. Apple will be unable to maintain its market share of 55 percent (three times as much as Android) and 66 percent on the iOS and iPad as Android will gain further momentum and Amazon’s low priced Kindle Fire will cut deeply into Apple’s tablet reign. In relation to current earnings Apple is not expensive but expectations about future profit growth will come down hard as competition reaches insane levels and crushes Apple’s profit margins.

2 – EU DECLARES EXTENDED BANK HOLIDAY DURING 2012

The December EU Treaty changes prove insufficient to solve EU funding needs – particularly those in Italy – and the EU debt crisis returns with a vengeance by mid-year. In response, the stock market finally caves in and drops 25 percent in short order, prompting EU politicians to call an extended bank holiday – closing all European exchanges and banks for a week or more. EU leaders gather like Vatican cardinals at a conclave to hammer out a “New Europe”. This could result in EU officials overstepping their mandate once again with new burdensome command and control measures that further violate the principles of the EU and free markets. Regardless, this “final” attempt leads straight to a popular overthrow of the old order and beginning of destruction of the sovereign debt time bomb. A period of pain is inevitable, but this will quickly allow a “new EU” to regroup with new membership and a new base from which its economies and markets can start planning for the future, rather than dealing with the mistakes of the past.

3 – A YET UNANNOUNCED CANDIDATE TAKES THE WHITE HOUSE

In 1992, a savvy, yet highly erratic Texas billionaire named Ross Perot managed to take advantage of a recessionary economy and popular disgust with US politics and reap 18.9 percent of the popular vote. Step forward to 2008, and Obama promises “real change” from eight years of Republican rule as the economy is nose-diving. Now, three years of Obama has brought too little change and only additional widespread disillusionment with the entire US political system. Going into the election in 2012, the incumbent Democrats are in ideological disarray and will get the blame for continued economic malaise and the favour-the-rich Republicans will never win the popular vote with the US rich/poor gap at a record width and social tension rising. In short, conditions for a third party candidate have never been riper. Someone smart enough to sense this and with a strong programme for real change throws his hat in the ring early in 2012 and snatches the presidency in November in one of the most pivotal elections in US history, taking 38 percent of the popular vote. A new political order is born.

4 – AUSTRALIA GOES INTO RECESSION

The Chinese locomotive has been losing steam throughout 2011 as investment and real estate led growth becomes harder and harder to come by due to diminishing marginal returns. The effects of the slowing of the up-and-coming Asian giant ripple through Asia Pacific and push other countries into recession. If there ever was a country dependent on the well-being of China it is Australia with its heavy dependence on mining and natural resources. And as China’s demand for these goods weakens Australia is pushed into a recession, which is then exacerbated as the housing sector finally experiences its long overdue crash – a half decade after the rest of the developed world.

5 – BASEL III AND REGULATION FORCE 50 BANK NATIONALISATIONS IN EUROPE

As 2012 begins, pressure will mount on the European banking system as new capital requirements and regulatory pressure force banks to deleverage in a great hurry. This creates a fire sale on financial assets as there are few takers in the market. Troubled sovereigns, structural funding gaps and massive trading books set the scene for the largest bank rescue operation in Europe’s history. Politicians, eager to score points with the public, create a regulatory mob enforcing value destruction in the banking system “in the name of greater good”. A total freeze of the European interbank market forces nervous savers to make bank-runs, as depositors distrust deposit guarantees from insolvent sovereigns. More than 50 banks end up on government balance sheets and several known commercial bank brands cease to exist.

6 – SWEDEN AND NORWAY REPLACE SWITZERLAND AS SAFE HAVENS

Sweden and Norway are at risk of replacing Switzerland as the new safe havens – “risk” because, as we saw with Switzerland, becoming a safe haven in a world of devaluing central banks presents a number of risks to a country’s economy. The capital markets of both countries are far smaller than Switzerland, (the combined FX volume in Sweden and Norway being a mere fraction of Switzerland’s), but the Swiss are aggressively devaluing their currency and money managers are looking for new safe havens for capital. At the same time, Germany and its balance sheet are embroiled in the EU debt debacle and the classic safe haven appeal of 10-year Bunds is fading fast. Sweden and Norway sport excellent current account fundamentals, prudent social policies and skilled and flexible labour forces. Flows into the two countries’ government bonds on safe haven appeal becomes popular enough to drive 10-year rates there to more than 100 basis points below the classic safe haven German Bunds.

7 – SWISS NATIONAL BANK WINS AND CATAPULTS EURCHF TO 1.50

Switzerland’s persistency in fighting the appreciation of its currency will continue to pay off in 2012. After the dramatic failure of direct FX intervention in the market in 2009 and 2010 and after EURCHF threatened to destroy the Swiss economy with its death spiral towards parity in mid-2011, the Swiss National Bank and Swiss government finally joined forces to engineer an aggressive expansion of money supply and established a floor in EURCHF at 1.20. With Swiss fundamentals – particularly export related – continuing to suffer mightily in 2012 from past CHF strength, the SNB and government bear down further to prevent more collateral damage and introduce extensions to existing programmes and even negative interest rates to trigger sufficient capital flight from the traditional safe haven of Switzerland to engineer a move in EURCHF as high as 1.50 during the year, much to the chagrin of those who believe central banks can’t intervene successfully.

8 – USDCNY RISES 10 PERCENT TO 7.00

The impressive growth rates in the world’s second-largest economy, China, since the end of the Great Recession have been predicated on investment and exports. As marginal returns from building million-inhabitant ghost towns diminish and exporters struggle with razor-thin margins due to the advancing CNY China gets to the brink of a “recession”, meaning 5-6 per cent GDP growth. Chinese policymakers come to the rescue of exporters by allowing the CNY to decline against a US Dollar – buoyed by its safe-haven status amid slowing global growth and an on-going Eurozone sovereign debt crisis – and send the pair up to 7.00 for a 10 percent increase.

9 – BALTIC DRY INDEX RISES 100 PERCENT

Despite the dry bulk fleet being expected to outgrow demand in 2012, leading to further over capacity, several factors could surprise resulting in a price spike in the Baltic Dry Index. Lower oil prices in 2012 could lead to an increase in the Baltic Dry Index as operating expenses go down. Brazil and Australia are expected to expand iron ore supply, further leading to lower prices and therefore higher import demand from China to satisfy its insatiable industrial production. In combination with monetary easing this leads to a massive spike in iron ore demand. The last shock that could impact the dry bulk market is exceptional dry weather, due to El Nino, leading to a plunge in hydropower electricity generation and thereby fuelling demand for coal imports.

10 – WHEAT PRICES TO DOUBLE IN 2012

The price of CBOT wheat will double during 2012 after having been the worst performing crop in 2011. The drop was brought about due to a combination of farmers responding to high prices in 2010/11 and normalised weather in the Former Soviet Union. However with 7 billion people on the earth and money printing machines at full throttle bad weather across the world will unfortunately return and make it a tricky year for agricultural products. Wheat especially will rally strongly as speculative investors, who had built up one of the biggest short positions on record, will help drive the price back towards the record high last seen in 2008.

Decaying Monument To The Epic China Bust To Come

15 Dec

From Reuters:

China’s deserted fake Disneyland

Along the road to one of China’s most famous tourist landmarks – the Great Wall of China – sits what could potentially have been another such tourist destination, but now stands as an example of modern-day China and the problems facing it.

Situated on an area of around 100 acres, and 45 minutes drive from the center of Beijing, are the ruins of ‘Wonderland’. Construction stopped more than a decade ago, with developers promoting it as ‘the largest amusement park in Asia’. Funds were withdrawn due to disagreements over property prices with the local government and farmers. So what is left are the skeletal remains of a palace, a castle, and the steel beams of what could have been an indoor playground in the middle of a corn field.

All these structures of rusting steel and decaying cement, are another sad example of property development in China involving wasted money, wasted resources and the uprooting of farmers and their families. It is a reflection of the country’s property market which many analysts say the government must keep tightening steps in place. The worry is a massive increase in inflation and a speculative bubble that might burst, considering that property sales contribute to around 10 percent of China’s growth.

And here is little old Australia, staying (barely) afloat in unprecedentedly turbulent global economic seas, by wearing Floaties bought with the proceeds of flogging iron ore and coal to China.

A China whose steel mills apparently aren’t needing so much of our product anymore.

From ZeroHedge (emphasis in original, underline mine):

Forget Copper; Steel Is The True Indicator Of The Chinese Hard Landing

“The investment landscape for industrial metals is becoming increasingly more difficult to navigate. As highlighted in last month’s letter, we are continuing to see a rapid deceleration of growth in China, specifically within the cyclical industries. A recent trip to visit steel companies outside Beijing underlined the impact of extremely tight liquidity and continued restrictive policy in the Chinese housing market. Steel capacity cuts – through idling or accelerated maintenance outages – are now commonplace and the speed of these cuts has certainly surprised the market. Construction is the principal end-market blamed for this weakness…

Zoomlion, China’s second largest construction machinery company, recently said, “Demand for construction  machinery has shrunken drastically and growth will no doubt continue to slow next year.” Within the context of declining housing starts, plummeting transaction volumes and the beginning of a meaningful move down in housing prices, these shifts in the steel market have been an interesting harbinger of more substantial problems in the Chinese economy. Our principal concern is the extension of housing weakness into the banking system through the mechanism of both failing developers as well as the opaque and informal lending. We are concerned that the recent strength in iron ore, steel and copper has been misinterpreted by the market. In our view, any suggestion that the Chinese market is undergoing a substantial restock is misplaced.” Today, we get a confirmation of just this warning courtesy of Citigroup which has charted weekly Iron Ore China port inventories and of broad steel inventories. Needless to say, domestic steelmakers, who better than anyone know the state of domestic end product demand, have seen the writing on the wall, and have one message for the world: short Brazil and Australia.

Click to enlarge

GDP Growth Hangs On China Thread

7 Dec

September quarter GDP data is out from the ABS.

Prepare yourself for much trumpeting from all the usual suspects (Government, lamestream media, Labor supporters) about the headline figure – “strong” growth of 1% (“seasonally adjusted” ie, fiddled) in the September quarter, thus lifting “annual growth” to 2.5%.

Prepare yourself to not hear any trumpeting of the fact that is still 30% below the Treasury’s very recently revised 3.25% “estimate” for 2011-12 … and now half the year is over.

Or, any trumpeting of the important detail. State Final Demand:

Click to enlarge

All the “growth” in July-September came from the mining states of WA (4.1%) and QLD (2.9%).

The rest of the country is either in (SA, TAS, ACT), or near (NSW, VIC) recession.

Make no mistake dear reader.

Australia’s economy … and Wayne’s “surplus” … is hanging on China.

Everything else is noise.

China’s Vice Premier “Certain” Of Long-Term Global Recession

24 Nov

Really looking forward to seeing Waynes’ massaged MYEFO now.

From Business Spectator:

China triggers the recession alarm

Last night’s fall in global share and commodity markets plus the slump in the Australian dollar will affect not just Australian superannuation balances and consumer confidence, but will extend deep into sectors of the Australian dwelling market. If you are about to buy or sell an apartment or house, you need to be aware of the forces that have been unleashed.

The most dramatic contributor to last night’s drop, from an Australian point of view, was not the growing frustration with Europe; it was not the global banking crisis; and it was not the fact that the US must introduce mandatory spending cuts. All of those events were very important, but what spooked our part of the world was the statement by Chinese Vice Premier Wang Qishan that a long-term global recession is certain to happen and China must focus on domestic problems.

And from CNN Money:

European stocks were getting slammed Monday, after Moody’s Investors Service issued a dire warning on French bonds, and Asian markets were dampened by pessimistic remarks made by a high-ranking Chinese official.

“China’s Vice Premier Wang Qishan said that the current economic situation is extremely serious and is certain that a global recession triggered by the international crisis will last a long time,” wrote the Deutsche Bank analysts in a report to investors.

And the “hot money” (ie, speculator-driven) that had been keeping the AUD artificially strong … until late 2008 … and, until recent weeks … is not just fleeing Australia.

It’s fleeing China too.

From the Wall Street Journal:

Hot Money’s Hurried Exit From China

More signs of bearish sentiment on China, this time from cross border capital flows.

Data released Monday showed China’s banks were net sellers of foreign currency in October (in Chinese). That’s unusual because China’s trade surplus, combined with inflows of direct investment, mean the mainland’s banks are almost always net buyers of foreign currency.

Indeed, the numbers normally suggest that in addition to the trade surplus, banks are buying up speculative capital flowing into the economy. Tuesday’s numbers suggest that now speculative capital might be exiting China. That makes sense given diminished expectations of yuan appreciation, falling property prices and a deepening crisis in Europe pushing investors away from risky positions.

A comparison with past occasions when hot money has flowed out of China provides little reassurance. Netting out the trade surplus from banks’ FX purchases gives a rough approximation of the scale and direction of capital flows. The last time it turned negative was May 2010, when fears of a double dip downturn were on the rise. The time before: the eve of the financial crisis in August 2008.

Come on now Wayne.

Out with the MYEFO already.

Surely all this is nothing for the World’s Greatest Finance Minister to handle:

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