Australia's commodity market relies heavily on Chinese purchases. In fact, commodities make up 57% of our total exports. And for the first time, Australia's 'two-way' trade with China topped $100 billion. So why aren't we more concerned that media coverage on China's brewing bubble has died down in the past few weeks? Problems with an asset bubble in China will affect your investments in Australia. The first sector to be hardest hit? The mining sector. Which for now, is the most productive industry in Oz. But that could change. Yet the Aussie consensus seems to be: don't worry... the Chinese government will wangle a soft landing. Chinese leaders have more influence their economy than Western leaders do. But anyone who thinks the Chinese can change what will take place is wrong. A work mate sent me this article on China's fixed asset bubble. You'll find the meaty bits below (emphasis mine), showing you just how big the China bubble is: By some measures, China's physical capital base already looks like that of a major developed economy. Consider the installed capacity of China's steel industry. Now roughly 5 times the size of what it was a decade ago, capacity is nearly twice that of the United States, Japan, and the European Union combined. Notably, the latter collection of economies has nearly 1 billion people of its own and collective GDP of about $36.6 trillion, making it more than 6 times the size of China's economy. The biggest contributor to China's fixed-asset investment boom, particularly in the past few years, has been residential real estate. Throughout the 2000s, China built housing at a blistering pace, adding a cumulative 120 square feet in residential floor space per person. This is understandable, given the significant additions China made to its urban population over the period. What is less understandable is the roughly 80% surge in the rate of floor space additions we've seen in the past few years, which has not been accompanied by a comparable surge in urbanization. On a per capita basis, China now has nearly 5 times the amount of residential floor space under construction as the U.S. in its peak housing boom. This is particularly remarkable since, despite enormous gains in wealth and income, Chinese remain on average much poorer than their American counterparts and tend to occupy residences that are much smaller. By any measure of fixed-asset investment intensity--growth rates, share of cumulative GDP growth, or share of GDP--China has far surpassed the precedents set by Japan, Korea, and Taiwan. We estimate that, relative to the starting size of the economy, cumulative additions to Chinese capital stock in its boom decade have been 43% greater than Japan's, 33% greater than Korea's, and 49% greater than Taiwan's. The thing is, China's credit bubble is peaking. China's economy has grown 171% since 2000. But continuing on this growth is simply unsustainable. And this will be as plain as day in 2012, when China's central planners lose control of their economy. I think there's too much trust that China can manage the credit boom for a few more months. That's the nature of bubbles. First, you deny the problem. But at some point - my best guess is the first half of 2012 - you come to accept it. But by then it will be too late to prepare. Australia's resources industry is incredibly dependent on China's growth. As China's growth is about to start pulling back, it will dampen Chinese demand for our resources. Take the time to revaluate your exposure to the mining sector in preparation for China's asset bubble. Greg Canavan Editor, Sound Money. Sound Investments
