''Australian Exceptionalism''

[Platypus]

http://blogs.crikey.com.au/pollytics/2011/12/08/australian-exceptionalism/

...or why we all need to get a hold of ourselves, take a deep breath, and realise weŕe pretty bloody well off.

[Ban my account ffs!]

Australia has a wealth of natural resources for such a small population and is in a perfect spot geographically to provide those resources to resource hungry growing economies of south and east Asia.

You have low debt ratios because you are an export based economy.  You're well off because you're living off of the debt of other nations that buy your products.

I don't think it was anything in particular that Australia did... you're just in the right place at the right time with the right rocks in the ground.

Prior to the past 25 years, Australia was in the middle of nowhere and was seen as a quaint nation of friendly people with endearing accents who said funny words and somehow survived an inordinate number of insanely poisonous animals.  And in many respects, you still seem to have many of those qualities.

[Politico]

Australia is in an enviable position and seems to be quite serious about keeping things running smoothly. Other than Canada, Australia is the only place I would invest abroad right now.

[Wonkish1]

Australia is in an enviable position and seems to be quite serious about keeping things running smoothly. Other than Canada, Australia is the only place I would invest abroad right now.

I wouldn't. If I was more of a shorter instead of just using it as a hedge, I would probably be shorting the hell out of Australia today.

Australia has hitched its wagon way, way to close to the China tiger today and they are going to end up paying for that.

The best opportunities out there today are probably in non Brazil Latin America, the Persian Gulf countries like Saudi Arabia, non Dubai UAE, Kuwait, Qatar, etc., South Korea and Indo China, etc., and for a lack of better options the USA(because we're the only big country left not in a terrible position just not in a particularly good one), and Germany(non large Financial Institutions) because I think that the Euro will eventually break apart and your German assets will appreciate significantly by Deutsche Mark appreciation against other currencies.

But the name of the game going forward isn't return on capital its return of capital in real terms. So this is a game of survival not so much maximizing opportunities(even though there are certainly a large share of them).

[Politico]

I am extremely risk averse and I do not like the political instability of those regions. You cannot even trust much of the data that comes out of many of those places, and that's right now. Imagine what it would be like if late 2008 to the power two really occurs worldwide. Even South Korea and Taiwan, and South Korea is easily my favorite Asian country, could get hairy if things get really ugly in China. The nice thing about Australia is its isolation, stability, and abundance of resources. The same applies to Canada, of course, but their added proximity to us makes them easily the safest place to invest abroad.

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Scary, but true. America is really the only risk-free bet for Americans. I mean, if even we are not risk-free from our perspective than we might as well move into a log cabin in Montana and live off the land. I still think the only events that could possibly cause such a disaster would be a worldwide epidemic, a comet wiping out much of the planet, nuclear armageddon, or some sort of electromagnetic pulse from space that destroys all electronic devices on the planet. Extremely unlikely stuff.

[Wonkish1]

I am extremely risk averse and I do not like the political instability of those regions. You cannot even trust much of the data that comes out of many of those places, and that's right now. Imagine what it would be like if late 2008 to the power two really occurs worldwide. Even South Korea and Taiwan, and South Korea is easily my favorite Asian country, could get hairy if things get really ugly in China. The nice thing about Australia is its isolation, stability, and abundance of resources. The same applies to Canada, of course, but their added proximity to us makes them easily the safest place to invest abroad.

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Scary, but true. America is really the only risk-free bet for Americans. I mean, if even we are not risk-free from our perspective than we might as well move into a log cabin in Montana and live off the land. I still think the only events that could possibly cause such a disaster would be a worldwide epidemic, a comet wiping out much of the planet, nuclear armageddon, or some sort of electromagnetic pulse from space that destroys all electronic devices on the planet. Extremely unlikely stuff.

First Politico there is risk in every decision. A lot of people run around and act like there isn't risk in all these asset classes when really there is, its just different types. I mean FDIC insured assets like CDs may be safe from a systemic or market loss standpoint, but they still have inflation risk and defacto interest rate risk, curve risk, duration risk, etc. you just don't realize it because unlike bonds their isn't a resale market.

Well comparatively South Korea is the "best of the worst"(for the lack of a better term) in Asia today, but that is the case with practically every country I just listed. Systemic risk is going to spread throughout the world and losses in China are going to lead to losses throughout East Asia and the 2 big mineral producers of Australia and Brazil. The point though is that systemic risk and losses don't spread equitably. Certain countries are barely hit and others are severely hit. South Korea is going to probably suffer the least in Asia.

Australia isn't isolated. Your thinking way to geographically. In the modern world that isn't realistic. South Korea is substantially more isolated than Australia is from problems with their trading partners. Australia is possibly the most tied to China's problem industry(real estate) than probably any country on this planet. Brazil would be the second most tied. Proximity no longer means much in this day and age.

I wouldn't necessarily call Canada the safest. I probably should add Canada to the list, but they do have some severe real estate problems of their own in places like Vancouver largely because of Chinese capital flow. At the same time they have oil though which probably mitigates things a bit. So I'd say that Canada(not Australia) is a reasonable place to put some money.

Not even the black plague could stop the march of economic progress and trade in this world. Don't worry the upcoming events are going to hurt a lot, but nothing can destroy never ending march of human progress except for the destruction of the human race itself.



Politico even if there is risk in the countries I listed above that isn't a reason alone to avoid them. Essentially what we do in times of higher than normal risk is dial back our exposure to higher risk assets and increase lower risk assets(which is a given). So that means a lot more cash, short duration bonds, etc., but we're not going to leave our clients 100% exposed to inflation risk without anything to carry that water. So we still maintain positions in productive assets(for example), and invest in some equities in countries and industries that we feel are less risky than their peers. We then offset *some* of those long positions with "fat tail asymmetric hedges". So we take out some short positions against what we feel are high problem areas that haven't been realized yet or where participants are underestimating the problem. So we've held a decent chunk against assets in China(and we still do). And not to long ago we started adding some short positions against Japan and France.

So essentially we sit with a lot of safety and lot of capital that can be deployed to buy up cheap assets after a crash. If somehow these huge heads in Europe, China, etc. are able to successfully kick the can down the road a little ways we're still fine because our long positions will continue to perform(even after the small cost of hedges). And if systemic risk spreads we feel our asymmetric hedges will way, way outperform and gain us more money than our longs lose us money leaving us near flat from today if there is a crash. Then as said above if the crash happens then we go shopping which is our favorite time to take on a lot of exposure because we feel its an easy time for us to better price risk against our peers especially when they have liquidity problems and no new capital to deploy and we don't have those problems.

So while we take some positions that may be considered a little more risky we offset those positions with other risky short positions making our overall portfolio very stable. And we do this purely because while I think I'm good at what I do nobody has a perfect crystal ball to bet the house on one asset class(whether cash or shorting China). So these long positions act as an insurance policy in case I'm a little bit or very wrong. If I was a ballsy guy that could afford to risk my career on something betting the house I would short the living hell out China, Japan, and France with half our assets and keep the other half in cash, but then if I'm wrong(even if I'm not quite sure how I could be) then I'm out of the game and my firms clients pay the price for my errors.

[Politico]

An excellent post, but I think you may be underestimating the degree of social upheaval and military conflict in the Middle East and Asia if there is another global economic recession that exceeds 2008/2009 in severity. For example, I can easily see Tienanmen Square making 1989 look like child's play, and I do not believe any country in the Middle East is definitely immune to the type of upheaval seen in Libya if economic conditions decline severely. If China goes down hard, or if there is some sort of uprising in North Korea that threatens its very existence, there is no way there will not be consequences in Taiwan and South Korea. All bets are off on what would happen in the area. My philosophy is to hope for the best, but expect the worst, and I am expecting nothing good to come out of Asia and the Middle East for the foreseeable future. That is not to say I would recommend shorting anything. I am too risk averse for that. But I would caution against going long on anything in those areas of the world for the foreseeable future.

Australia is obviously trading heavily with China right now, but they can divert their trade in other directions as necessary. In the long-run, their resources are going to be in high demand worldwide. Even if things go completely sour worldwide, I am talking 1930s-like sour where world trade is cut in half and refugees from all over are scrambling for food and shelter in whatever nation they can find it, at least the institutions in play in Australia are able to ensure stability economically and politically until the storm passes (primarily due to their isolation geographically). Their abundance of resources is not going to go away in the near-term, and will eventually be moved one way or another. As such, I feel like you cannot lose with Australia in the long-run. The same applies to Canada with the added benefit of them basically being our definitive satellite state if one cares to use that terminology.

As for hedging against inflation in America, that's what American food producers/distributors are for. People will need to eat no matter how high inflation goes.

[Wonkish1]

An excellent post, but I think you may be underestimating the degree of social upheaval and military conflict in the Middle East and Asia if there is another global economic recession that exceeds 2008/2009 in severity. For example, I can easily see Tienanmen Square making 1989 look like child's play, and I do not believe any country in the Middle East is definitely immune to the type of upheaval seen in Libya if economic conditions decline severely. If China goes down hard, or if there is some sort of uprising in North Korea that threatens its very existence, there is no way there will not be consequences in Taiwan and South Korea. All bets are off on what would happen in the area. My philosophy is to hope for the best, but expect the worst, and I am expecting nothing good to come out of Asia and the Middle East for the foreseeable future. That is not to say I would recommend shorting anything. I am too risk averse for that. But I would caution against going long on anything in those areas of the world for the foreseeable future.

Australia is obviously trading heavily with China right now, but they can divert their trade in other directions as necessary. In the long-run, their resources are going to be in high demand worldwide. Even if things go completely sour worldwide, I am talking 1930s-like sour where world trade is cut in half and refugees from all over are scrambling for food and shelter in whatever nation they can find it, at least the institutions in play in Australia are able to ensure stability economically and politically until the storm passes (primarily due to their isolation geographically). Their abundance of resources is not going to go away in the near-term, and will eventually be moved one way or another. As such, I feel like you cannot lose with Australia in the long-run.

As for hedging against inflation in America, that's what American food distributors are for. People will need to eat no matter how high inflation goes.

Yeah, but if there is social upheaval in China than that would lead to our trade doing better not worse. If China gets hit hard my short positions return me more than even medium sized losses in South Korea or the US. That is how they are set up.

In regards to the Middle East you have to separate the two parts of the Middle East its not some uniform region with the same instability risks. There is practically no chance in my mind of any upheaval in Qatar, Abu Dhabi, Kuwait, etc. because per capita you are looking at some of the wealthiest places on earth. That is very different from the rampant poverty hell holes of Egypt, Libya, Yemen, and even to some extent Syria. I wouldn't invest in Egypt today if hell froze over, but Abu Dhabi and Qatar are pretty sexy. Kind of like how South Korea, Singapore, and Hong Kong just trounced China, India, Indo China, etc. for many, many years. Abu Dhabi and Qatar are like these islands of insane wealth and stability in the middle east just like the S. Korea, Singapore, and Hong Kong were for many years in Asia.

So in the case of Asia I'm going long what I think is most stable and going short what I think is most unstable. My net exposure to Asia is actually more short than long because most of my long positions are still centered in the US.


Where does Australia divert their trade to? Where is this magical other country or group of countries that is going to immediately pick up China's slack? Also what's going to stop their property markets from crashing that are highly dependent on the flood of hot money from China. Australia wont collapse or anything. They just might end up seeing a few quarters of decent sized GDP losses and a short period of unemployment skyrocketing pretty quickly. They aren't going to be scrounging for food or anything. Its just a decent chunk of wealth is going to be destroyed. Geographic isolation doesn't mean really anything today.

[Wonkish1]

Look in a nutshell we took a little more than half of our assets and positioned moderately for continued meager growth, positioned strongly for a *hard landing*(or hard crash), and positioned weak in a case of a "soft landing" or (small crash).

So if things continue like they are right now we return a few percent. If they crash very badly in those hot spots we return a large percent. If they crash bad, but not very we break even. If a very "soft" crash happens(which is what most of professionals in the industry think and are sort of betting on) then we take a meager to small sized loss. If somehow I've got this completely backwards and all of the countries I'm worried about are fine and all the areas I think are sitting better than their peers aren't then we're looking at decent sized loss. Of course this summary is a gross oversimplification, but that is how we are set up.

[2952-0-0]

Anyone can claim to be fearful about risk or cooked statistics, but as others have said it's simply impossible to avoid these even in the home country. And yes, the past decade has plainly demonstrated that cooked books are a serious problem for the US as well.

Reading this thread is like entering a doomsday club where the only trusted investment is inflation linked treasuries or gold. Hedging is of course important, but without any appetite for risk (and yes, China and the Middle East are always, always on the verge of going to hell ), investment won't be protected.

Anyone who's read the situation on the ground in China and talked to very ordinary people there will understand that revolution is on no one's minds, though inflation and housing are so. Large emerging markets are also very resilient and even in the case of massive crises, the economy usually strongly bounces back within a few short years.

Anyone who invested in China shortly after Tiananmen Square, or in Indonesia shortly after Suharto's fall would have been called nuts then. They'd be driving Lambourghinis now. Likewise I'm positive there are ridiculously undervalued assets in Egypt or Pakistan or Libya at the moment (just stick to things more shielded from fixed investment such as boring consumer staples, though).

[Wonkish1]

Anyone can claim to be fearful about risk or cooked statistics, but as others have said it's simply impossible to avoid these even in the home country. And yes, the past decade has plainly demonstrated that cooked books are a serious problem for the US as well.

Reading this thread is like entering a doomsday club where the only trusted investment is inflation linked treasuries or gold. Hedging is of course important, but without any appetite for risk (and yes, China and the Middle East are always, always on the verge of going to hell ), investment won't be protected.

Anyone who's read the situation on the ground in China and talked to very ordinary people there will understand that revolution is on no one's minds, though inflation and housing are so. Large emerging markets are also very resilient and even in the case of massive crises, the economy usually strongly bounces back within a few short years.

Anyone who invested in China shortly after Tiananmen Square, or in Indonesia shortly after Suharto's fall would have been called nuts then. They'd be driving Lambourghinis now. Likewise I'm positive there are ridiculously undervalued assets in Egypt or Pakistan or Libya at the moment (just stick to things more shielded from fixed investment such as boring consumer staples, though).

There is nothing in my comments that are doomsday. I've been very specific throughout my time on here that I am predicting a rather hard crash in various markets around the world, but there is no way I'm referring to the "economic Armageddon" or "doomsday" scenarios that other people are referring to. What they are describing has never happened in human existence and that includes countries bombed into oblivion.

By the way, speaking of cooked books have you ever seen the "cooked books index" before? Its quite funny actually. Its predicated on a smart, but not quite perfect science about the proportion of 1s to 2s to 3s to 4s, etc. in the universe and the degree of which the aggregate books of financial institutions in the US comport to that proportionality in the quarterlies. Its funny there is always a decent sized spike in the quarters before they start taking some losses.

I'm not really computing any "revolution" into our analysis. We're only looking at the overvalue of the property markets, the precarious position of their state owned banks, the effect those will have on the credit markets of China, and the degree that effects other parts of the economy.

Resilient like 1980s Japan? Because that is the position they are in today. The bounce back will be completely dependent on their governments response(let it go and they get their bounce back, try to prop everything up and paper over it and they turn into Japan). As soon as large scale write downs or governmental intervention starts occurring we'll be covering our shorts, and we'll be looking at what the government does to see if we want to play in the Chinese recovery or not.


And I'm sure there are very attractive undervalued assets in places like Libya, Egypt, Syria, etc., but I stay away from risks I don't understand and buying when there is rampant political instability risk is not one of those ones I really understand that well nor can I really attempt to price it. And sadly I just can't play in areas like distressed debt because I don't have the size nor the manpower to do it.

One key to doing well in Finance is sticking with what your comfortable with and not straying outside of that.

[2952-0-0]

I'm not really computing any "revolution" into our analysis. We're only looking at the overvalue of the property markets, the precarious position of their state owned banks, the effect those will have on the credit markets of China, and the degree that effects other parts of the economy.

Yes, for sure there's a large property value bubble in many major cities (though this is hardly new in the region; Hong Kong suffered an even greater property crash and bounced back resiliently). But, as long as the state-owned banks have a captive body of massive savers, they can afford to offer negative real savings rates to depositors, and hence force depositors to "bail out" themselves. And besides, there are very few other places for the average Chinese household to place their savings (unless they're super wealthy and have connections, of course).

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This is a total misunderstanding of the situation in China. First, Japan's GDP Per Capita was far beyond the G7 average in the late 1980s. China's is still at El Salvador levels, and no one claims that El Salvador suffers from overinvestment. There are still nearly limitless places for growth potential and smart investments. Again, even Indonesia, which experienced a catastrophe exceeding that of the Great Depression in the US and very nearly disintegrated as a country in the late 1990s, bounced back very strongly.

Second, one has to be aware of the deep political factors involved. "Do nothing" is simply not an option given the very intricate connections between the players. Debt owed by, say, property developers is often implicitly backed through guanxi by local government-owned "development companies", which are connected to Party officials who have their own political ambitions. No senior official worth his salt is going to destroy thousands of faces (not unless he risks being fired, literally or figuratively). Any writedowns by state-owned banks will not be made public to save their faces, though you can bet their army of accountants are combing at this moment. You have to understand the very deep cultural and political aspects to fully get this.

Third, what China fundamentally lacks right now isn't freedom (at least not economic) or capitalism. It's the widespread disregard of rules and regulations which creates the disincentive to make long term, knowledge intensive investments. A lack of any real legal system also creates the incentive to set up fly-by-night operations, which are naturally low margin and short term.

My prediction is that the state-owned banks will cover their losses by extracting a bailout-by-low-deposit rates from their savers. Unless you know Party insiders, you probably won't be aware of specific writedowns or recapitalizations until long after they occur. You can guess by parsing through statements, though. The empty housing will be filled at massive discounts, and their developers and connected Party officials will be disgraced and/or disappeared. Clearer and better land use regulations will be introduced, though the current problems won't fully disappear. The people coming to power next year will probably look positively on privatizing the state-owned enterprises which monopolize the most profitable parts of the economy, but will be restrained from doing so both internally and through the difficulties in conducting them fairly.

Bottom line is: they can easily force depositors to silently pay for bad property debts and have plenty of resources to cover any hole. But this situation can't last forever.

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Exactly, which is why it's important to actually understand what you're playing with instead of making false assumptions about the world.

[Wonkish1]

I'm not really computing any "revolution" into our analysis. We're only looking at the overvalue of the property markets, the precarious position of their state owned banks, the effect those will have on the credit markets of China, and the degree that effects other parts of the economy.

Yes, for sure there's a large property value bubble in many major cities (though this is hardly new in the region; Hong Kong suffered an even greater property crash and bounced back resiliently). But, as long as the state-owned banks have a captive body of massive savers, they can afford to offer negative real savings rates to depositors, and hence force depositors to "bail out" themselves. And besides, there are very few other places for the average Chinese household to place their savings (unless they're super wealthy and have connections, of course).

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This is a total misunderstanding of the situation in China. First, Japan's GDP Per Capita was far beyond the G7 average in the late 1980s. China's is still at El Salvador levels, and no one claims that El Salvador suffers from overinvestment. There are still nearly limitless places for growth potential and smart investments. Again, even Indonesia, which experienced a catastrophe exceeding that of the Great Depression in the US and very nearly disintegrated as a country in the late 1990s, bounced back very strongly.

Second, one has to be aware of the deep political factors involved. "Do nothing" is simply not an option given the very intricate connections between the players. Debt owed by, say, property developers is often implicitly backed through guanxi by local government-owned "development companies", which are connected to Party officials who have their own political ambitions. No senior official worth his salt is going to destroy thousands of faces (not unless he risks being fired, literally or figuratively). Any writedowns by state-owned banks will not be made public to save their faces, though you can bet their army of accountants are combing at this moment. You have to understand the very deep cultural and political aspects to fully get this.

Third, what China fundamentally lacks right now isn't freedom (at least not economic) or capitalism. It's the widespread disregard of rules and regulations which creates the disincentive to make long term, knowledge intensive investments. A lack of any real legal system also creates the incentive to set up fly-by-night operations, which are naturally low margin and short term.

My prediction is that the state-owned banks will cover their losses by extracting a bailout-by-low-deposit rates from their savers. Unless you know Party insiders, you probably won't be aware of specific writedowns or recapitalizations until long after they occur. You can guess by parsing through statements, though. The empty housing will be filled at massive discounts, and their developers and connected Party officials will be disgraced and/or disappeared. Clearer and better land use regulations will be introduced, though the current problems won't fully disappear. The people coming to power next year will probably look positively on privatizing the state-owned enterprises which monopolize the most profitable parts of the economy, but will be restrained from doing so both internally and through the difficulties in conducting them fairly.

Bottom line is: they can easily force depositors to silently pay for bad property debts and have plenty of resources to cover any hole. But this situation can't last forever.

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Exactly, which is why it's important to actually understand what you're playing with instead of making false assumptions about the world.

First I'll say that I'm impressed that their is finally someone here that has some serious financial knowledge. You should pop on here more often.

Second, Chinese property prices are about 30 times average income. In the US when subprime hit they weren't even 5 times income. There is going to be a huge crash(substantially harder than Hong Kong) and of course there can be a bounce back depending on what the government does, but it will be no where near current prices. The bounce back will be to a price that is still a fraction of the current one.

Third, paying savers below inflation returns might be a useful tool, but that is nowhere near sufficient to bail out the Chinese banks. In the late 90s and mid 2000s the state owned banks papered over their massive non performing loans by creating asset management companies, letting them take the bad debt, and then buying debt against those asset management companies. The debt has never been written down and those bad assets represent about 120% of the state owned banks book value. Once you compute in the current mess on top of that which is debt that equals a very large chunk of the economy there is no way they aren't insolvent going forward. Depositors can't bail them out. Only the government can by issuing sovereign debt or printing.

Fourth, I didn't say that China was going to go to near zero growth like Japan after their crash. What I'm saying is that if they try to prop this mess up it will be a drag on growth for at least a decade. That means that they join the other countries that have low per capita incomes and sub par growth rates. Just because you have low cost of labor doesn't mean you automatically deserve high growth rates. If your capital markets are literally broken because your banking institutions have become zombie banks because of all of the non performing loans left on their balance sheets then your growth rate cannot possibly be remotely close to what it would be with capital markets not burdened with non functioning assets that take up the space of bank balance sheets.

I doubt do nothing is going to happen, but it is probably one of the best options given the proclivities of the PSC. Personally, so that I would be tempted to taking a long position after the crash I'm rooting for the state to bail out a few key entities and let the rest price, that is the best you can hope for. Otherwise we are talking about whole scale bailouts across the board and their is no way they can continue the high growth rates they've had with that much $hitty bad debt hanging over them. Otherwise I get that you fairly clearly understand the Chinese psychology of "saving face." Furthermore, I would say that writedowns wont be public. I probably shouldn't have said write downs, but instead defaults. But ultimately we are looking for clear signs that the system is capitulating to the reality of the situation they find themselves in. By that time the common equity of the positions we are shorting will be hurt severely.

I agree with your comments about the disregard of rules and the impact that has on long term investing, but that has little impact on what we're talking about(that is more of a down the road issue). Right now the simple fact is that the math doesn't come close to adding up and that means they are going to pay the price.

With the exception of this: "My prediction is that the state-owned banks will cover their losses by extracting a bailout-by-low-deposit rates from their savers." I agree with everything in your next paragraph.


There is a limit to how much sub market rate depositor rates can bailout banks that have large quantities of bad loans that are worth fractions of par. That is no longer a reasonable solution for this one.

We feel that we have a pretty damn good understanding of the issues in China. We have been predicting the situation playing out in China exactly as it has for the last 2 years. I don't think you could reasonably say that we don't know what we're getting ourselves into. The soft landing people I just don't think are realistic.

[Platypus]

/thread hijack

A particularly interesting graph from the article:

[Gustaf]

This is a bit time-frame dependent. Australia was the richest country in the world a century ago, so in that context they haven't done all that great.

[Filuwaúrdjan]

This is a bit time-frame dependent. Australia was the richest country in the world a century ago, so in that context they haven't done all that great.

Of course Australia is no longer the most favourably positioned part of the largest commercial Empire on the planet, but, yeah, fair point. I think the main thing to note about Australia is consistency; it has pretty always been an extremely prosperous place for ordinary people, at least compared to elsewhere. It's why they found it so easy to boost their population through immigration post-war, and so on.

[2952-0-0]

Second, Chinese property prices are about 30 times average income. In the US when subprime hit they weren't even 5 times income. There is going to be a huge crash(substantially harder than Hong Kong) and of course there can be a bounce back depending on what the government does, but it will be no where near current prices. The bounce back will be to a price that is still a fraction of the current one.

The 30 ratio is only in Beijing, Shanghai, and a few really bubbly places such as coastal resorts, and resource-rich areas. It's like looking at house prices in Phoenix, Las Vegas, and Orlando in 2006 and concluding the sky is about to fall (yes, it did, but not nearly to the extent implied). And besides, if nominal incomes double in five years while house prices crash 50% in the same time (seems unrealistic, but this is China for you), the surplus will be mopped up quicker than expected. It will likely be a drag on headline growth, but China is now past the growth-at-all-costs stage anyways. For a few years now people have cynically noted that "GDP" sounds like the term "chicken fart", leading to many silly jokes.

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According to the PBC, the M2 supply is 8.17e13 Yuan and M1 is 2.77e13 Yuan. These are 12.84 trillion and 4.35 trillion USD respectively, or 218% and 74% of GDP respectively, both of which are far higher than in western economies. I'm not sure where 120% comes from, but bank loans make 120% of GDP. I don't believe these debts matter today given the 10% year-on-year growth and massive urbanization since then. And total debt as a proportion of GDP is much lower than in western countries. Hardly any of that is owned by foreigners. So while the downside risk exists, my gut feeling is that it's overblown.

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Exactly, so even the risk-averse and conservative, consensus-dependent PSC will take very drastic steps if their legitimacy is threatened in some way. And if the PSC still vacillates, someone will go over their heads (it's exactly how Deng Xiaoping ordered the crackdown in Tiananmen Square despite the opposition of the majority of the PSC). If they need to smash the faces of countless mid-level bureaucrats to save their behinds, you can bet your last buck they will put their rivalries aside and do so. If they need to impose a massive tax on the super-rich to both appeal to the masses and fund anything they need, they will go ahead. It's part of the social contract. And the vast population of savers still aren't free (or stupid enough) to put their money anywhere other than state-owned banks.

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The trickiest problem is the sheer opacity of balance sheets. Last year it was suddenly announced out of the blue that the China Railway Engineering Corporation made a massive $640 million loss on a contract building a light rail system in Mecca, in large part due to cost overruns and a rush to open before the Hajj. It immediately crushed the stock price. Earlier this year Chinese state-owned companies lost $18 billion in Libya, which nobody expected because contracts weren't made public. So don't just rely on state-owned companies. Private things (though these are also at the whims of bureaucrats) which rely on aggregate consumer demand should be looked at too.

[Platypus]

This is a bit time-frame dependent. Australia was the richest country in the world a century ago, so in that context they haven't done all that great.

...and a hundred years before that, we were two penal colonies and a bunch of aborigines.

[Wonkish1]

Second, Chinese property prices are about 30 times average income. In the US when subprime hit they weren't even 5 times income. There is going to be a huge crash(substantially harder than Hong Kong) and of course there can be a bounce back depending on what the government does, but it will be no where near current prices. The bounce back will be to a price that is still a fraction of the current one.

The 30 ratio is only in Beijing, Shanghai, and a few really bubbly places such as coastal resorts, and resource-rich areas. It's like looking at house prices in Phoenix, Las Vegas, and Orlando in 2006 and concluding the sky is about to fall (yes, it did, but not nearly to the extent implied). And besides, if nominal incomes double in five years while house prices crash 50% in the same time (seems unrealistic, but this is China for you), the surplus will be mopped up quicker than expected. It will likely be a drag on headline growth, but China is now past the growth-at-all-costs stage anyways. For a few years now people have cynically noted that "GDP" sounds like the term "chicken fart", leading to many silly jokes.

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According to the PBC, the M2 supply is 8.17e13 Yuan and M1 is 2.77e13 Yuan. These are 12.84 trillion and 4.35 trillion USD respectively, or 218% and 74% of GDP respectively, both of which are far higher than in western economies. I'm not sure where 120% comes from, but bank loans make 120% of GDP. I don't believe these debts matter today given the 10% year-on-year growth and massive urbanization since then. And total debt as a proportion of GDP is much lower than in western countries. Hardly any of that is owned by foreigners. So while the downside risk exists, my gut feeling is that it's overblown.

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Exactly, so even the risk-averse and conservative, consensus-dependent PSC will take very drastic steps if their legitimacy is threatened in some way. And if the PSC still vacillates, someone will go over their heads (it's exactly how Deng Xiaoping ordered the crackdown in Tiananmen Square despite the opposition of the majority of the PSC). If they need to smash the faces of countless mid-level bureaucrats to save their behinds, you can bet your last buck they will put their rivalries aside and do so. If they need to impose a massive tax on the super-rich to both appeal to the masses and fund anything they need, they will go ahead. It's part of the social contract. And the vast population of savers still aren't free (or stupid enough) to put their money anywhere other than state-owned banks.

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The trickiest problem is the sheer opacity of balance sheets. Last year it was suddenly announced out of the blue that the China Railway Engineering Corporation made a massive $640 million loss on a contract building a light rail system in Mecca, in large part due to cost overruns and a rush to open before the Hajj. It immediately crushed the stock price. Earlier this year Chinese state-owned companies lost $18 billion in Libya, which nobody expected because contracts weren't made public. So don't just rely on state-owned companies. Private things (though these are also at the whims of bureaucrats) which rely on aggregate consumer demand should be looked at too.

No its national average home/apartment/condo price to income. Beijing, Shanghai, etc. are even higher.

The surplus will not be mopped up. Did you know that there is more than enough commercial real estate that has been under construction to give every man, women, and child in China a 5 ft by 5 ft cubicle. There is no possible way that much excess supply can be soaked up. People are just dreaming. In both residential and commercial real estate the supply will be soaked up when the price starts coming very close to 0 from current prices.

Well thanks for adding to my point. Extremely high money supplies relative to GDP is a cause for concern in any country. Its because in 2008 the PBC printed like crazy to try to get the economy moving again. Now your seeing what is coming out of that. The first analysis I read on China's coming bust was back in mid 09 from my favorite hedge fund manager and he made the case almost entirely using monetary policy. The amount of debt(on balance sheet and off) in the financial system and real estate markets are staggeringly high. Its a lot higher than you think it is because of the amount of off balance sheet and underground debt in the market today. For many cities underground debt is a substantial majority of the entire economy.

The Chinese can't really do anything except print or start issuing a lot of sovereign debt to pay for the costs of an attempt to bailout the system. Current inflation rates are already to high to think they can print this and not have large repercussions for their economy. If they try to transfer most of their problem to sovereign debt they very quickly take on a sovereign debt level similar to the low end of most of the indebted world and that debts negative effect on growth will drag on for years. Personally, I think that they will move to print to save the companies they deem important and let the rest go because they don't want to pay up the amount it would take to bailout everything. So that means recap'ing the state owned banks(but common equity will be wiped out), that means bailing out key municipalities, and that means letting all of the property developers(save maybe a couple) go bankrupt that engaged in this. That is what I think will happen.

Actually, stupid state owned companies that don't report bad numbers when they happen, but  the situation is deteriorating is perfect because others can't see that deterioration keeping price artificially high for quite a while. Eventually though the losses have be taken somehow. Just because China is a socialist dictatorship doesn't mean they can suspend gravity.

[Politico]

I still disagree with you on Australia, but it's likely because my time horizon is significantly further out than yours. When I say their resources are going to be moved at a profitable rate to somewhere in the world over the long-run, I am talking over the next 20-30 years. I have no idea who will be buying up their resources in twenty years, but I am certain they will be moving. The worldwide demand has nowhere to go but up in the long-run. It seems the players over there run a tight ship and know how to get a return on investment. Ultra safe legal environment for investors, of course. Obviously there will soon be a dip with what is going to happen in China and Europe, but there is going to be a dip everywhere else in the world too. In that case, and in my ludicrously risk averse universe as somebody else has already pointed out (Yes, TIPS are king), it would make sense to wait and see what happens.

Despite the disagreement over Australia, I could not agree more about China. Which economist once said that command economies work well until they do not work, and then they really do not work? I have heard from other sources what you are describing, specifically with regards to real estate. Some of the stuff sounds quite insane...

Full disclosure: I am not in finance and all of my assets are in American and Canadian securities, so it's easy for me to say that Australia is a good bet, but I am not putting my money where my mouth is...

[Wonkish1]

I still disagree with you on Australia, but it's likely because my time horizon is significantly further out than yours. When I say their resources are going to be moved at a profitable rate to somewhere in the world over the long-run, I am talking over the next 20-30 years. I have no idea who will be buying up their resources in twenty years, but I am certain they will be moving. The worldwide demand has nowhere to go but up. It seems the players over there are run well and know how to get a return on investment. Obviously there will soon be a dip with what is going to happen in China and Europe, but there is going to be a dip everywhere else in the world too. In that case, and in my ludicrously risk averse universe as somebody else has already pointed out, it would make sense to wait and see what happens.

Despite the disagreement over Australia, I could not agree more about China. Which economist once said that command economies work well until they do not work, and then they really do not work? I have heard from other sources what you are describing, specifically with regards to real estate. Some of the stuff sounds quite insane...

Full disclosure: I am not in finance and all of my assets are in American and Canadian securities, so it's easy for me to say that Australia is a good bet, but I am not putting my money where my mouth is...

Fair point. I tend to make calls based on a 0 to 5 year time horizon. I tend to not say much in the way of 5+ years. Australia will have decent growth return after a likely sharp and reasonably harsh recession in several years. That is my outlook.

There will not be an equal dip everywhere. Some will get harder than others. Australia will be in the "harder" camp. They should emerge fine after a couple to few years though. It just takes a while for the rest of the world to pick up the slack of materials demand that China has today or it takes a while for Australia to build on other industries to pick up the GDP and employment that will suffer from a huge slowdown in Chinese demand and capital or a combination of the two.

[Gustaf]

This is a bit time-frame dependent. Australia was the richest country in the world a century ago, so in that context they haven't done all that great.

...and a hundred years before that, we were two penal colonies and a bunch of aborigines.

That's still true. And don't be racist, Hugh.

[Wonkish1]

Excerpt From Fortress Letter to Investors:

"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."

The two accompanying charts are a steep drop off in Chinese steel inventories and a huge increase of iron ore sitting at port. A clear sign that iron has started to accumulate at the ports because Chinese steelmakers no longer have the customer demand to justify making any more. They are shutting down production as we speak.

So in the near future who is going to buy Australia's and Brazil's iron at the same pace as China did for the last few years?