One of the world's biggest investors is worried. In an interview with Bloomberg News, hedge fund guru, Jim Chanos said, "The Chinese banking system is built on quicksand." He's just wound up a visit to Australia. And our bet is Australia's biggest resources stocks have entered his short book. But we'll get to that later. First, more news out of Europe... "Germany failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region's debt crisis is driving away investors." - Bloomberg News In simple terms, Germany's central bank only sold 3.9 billion-worth of bonds out of 6 billion offered to the primary market. The rest was sold in the secondary market. (The primary market gives a few select banks first bite before everyone else can have a go in the secondary market.) But this isn't the first time Germany hasn't sold all its bonds. According to Bloomberg, "Six of the last eight bond sales by Germany have been 'technically uncovered', with fewer bids than the maximum amount on offer." It's a great irony. The buyers of bonds in the primary market are the same mob that wants Germany to bail out the rest of the European Union to prevent its collapse. So while the banks are keen on bailouts, they don't want to pay for it. And why should they? With moral hazard out the window, the banks figure Herr & Frau Taxpayer will come good and everything will be fine. But what the heck. That's Europe. We're in Australia... 14,000 kilometres away. And we've got China to bail us out... What Happens in Europe Matters in Asia Just last week our old pal, Michael Pascoe told his poor readers: "...Beijing is not about to engineer a hard landing in its efforts to smack the luxury apartment investors... "And in both the short and medium terms, the transition to greater focus on Chinese domestic demand gets yet more impetus. The rise and rise of the Asian consumer matters much more than the faltering of the Old World consumer. "Which is all wonderful stuff for Australia as sustained Chinese growth means sustained Asian growth and therefore the fundamental underwriting of our economy remains in place even as the North Atlantic faces years of recession and/or stagnation." We think Jim Chanos had Pascoe in mind when he told Bloomberg News: "Our concerns about what we saw in Australia: an economy clearly tied to China... In terms of the general complacency, what we heard over and over... is, 'yes, yes, there are some excesses, but the government will figure a way out. That the government is this all-knowing, omniscient basic entity that will not prevent me from losing money.'" And no sooner had Mr. Chanos left these shores than Reuters reported: "China's factory sector shrank the most in 32 months in November on signs of domestic economic weakness, a preliminary PMI [Purchasing Managers' Index] survey showed, reviving worries that China may be slipping towards a hard landing and fuelling fears of a global recession." Stop. No. That's not possible. Because on Tuesday the "all-knowing" World Bank said: "On balance, we believe that while there are issues (in China), they are being managed and the magnitude of those issues does not add up to something that would lead necessarily to a major slowdown as some have talked about." The World Bank says the Chinese economy will grow 9.1% this year, and "9 to 10 percent per annum... for the foreseeable future." As we've warned before, the world economy is linked. Greece borrows from Italy. Italy borrows from France. France borrows from Germany (and Germany tries to borrow, but is having trouble)... But don't forget: Greece, Italy, France and Germany buy from China... and China buys from... that's right... Australia. In short, what happens in Europe, matters in Asia. This brings us back to Jim Chanos and the Chinese economy... Australia Walking on China's Quicksand Look, we know Chanos is talking his own book. But given a choice between two views - Pascoe or Chanos - we know which makes sense and which is jingoistic cheerleading. The important thing is economies don't grow non-stop forever - even China. But how about China's huge savings? Chanos has an answer: "The Chinese banking system is built on quicksand, and that's the one thing a lot of people don't realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there's liabilities against that." That's the key. Even if China's growth slows to 8% from 9%, it doesn't mean things will be fine. A 1% difference in growth is worth about $60 billion to the Chinese economy. That can buy a lot of products, services, resources and loans. But if the money isn't there it's bad news. Especially for companies that invested expecting the $60 billion to be spent. Think about it, it means China needs less iron ore... less copper... less concrete. It means fewer machines and workers (the Financial Times headlined this morning, "China labour unrest flares as orders fall"). Look, we've said it before: China doesn't have a miracle economy. It has an economy where bureaucrats push buttons and pull levers... where the mainstream has mistaken a plain old credit boom for ingenuity and innovation. And like all credit booms, this one will end in a bust. It you want a clue of what that will look like, look at Europe and the U.S. Only for Australia, the China bust will have a much bigger impact. Cheers. Kris.
Another one - slightly scarier http://www.theepochtimes.com/n2/china-news/chinese-tv-host-says-regime-nearly-bankrupt-141214.html
Either way you look at it - our "miracle economy" which is "the envy of the entire first world" will be feeling the full effect and more of the GFC from as early as next year. Besides exposing the rhetoric of the ALP/Greens government as unadulterated horseshit, it will also have the added benefit of finally popping the biggest bubble in RE history!! :lol:
YKY, I have been waiting since the 08 crash to dump some fiat into property. Because of govt intervention I have had to divert into stocks and physical. I can't wait for it to happen.
