The economy, the Chinese property market & Jim Chanos.
December 16th, 2011 · Greg Atkinson · 27 Comments
As we approach the end of another year we should not be surprised by the economic turmoil in Europe, the ailing U.S. economy or the rumblings of a major slowdown in the Chinese property market. The signs that all was not well with the global economy have been raised on this humble site going back more than a year. Simply put, borrowing vast sums of money and splashing it around did not fix the global economic imbalances highlighted by the market meltdown in 2008.
So here we are near the end of 2011 and the most of the major developed economies have shifted from enthusiastically embracing economic stimulus as a way to fix their ailing economies to implementing programmes to slash government spending.
In Australia over the last few years the government has tossed money at everything from home insulation & i-Pod docking stations at community centres to building new school halls at schools that didn’t really need new school halls.
Now with the Chinese economy slowing and commodities prices coming off their records highs the government has also decided to jump on the austerity bandwagon and will cut spending in an effort to try and balance the budget. (even if this means raiding The Future Fund)
Recently the Reserve Bank of Australia (RBA) emerged from its slumber, spotted the downside risks to the global economy (that I have been highlighting for most of this year) and started cutting interest rates.
In the RBA’s Statement on Monetary Policy in November the opening paragraph caught my attention:
“Over recent months the sovereign debt and banking problems in Europe have again taken centre stage. These problems have led to high levels of volatility in financial markets and an increased focus on the downside risks to global growth. While the recent announcements by European leaders initially led to some improvement in confidence, difficult decisions still lie ahead, with many European governments
facing a major challenge in putting their public finances on a sounder footing. The governments in the United States and Japan also face major medium-term fiscal challenges.”
In the opening paragraph the RBA mentions Europe, the United States and Japan but where is China? Well China is mentioned in the third paragraph in which the RBA observes that:
“In Asia, including China, growth remains solid, although below the pace in 2010.”
Thus the Groupthink mentality in Australia regarding the Chinese economy continues. Even if the Chinese economy is slowing that’s okay, all will be well because the growth is solid. There is no need to worry about commodities prices slumping because that apparently won’t happen.
However in the real world construction machinery makers like Komatsu of Japan are seeing demand for their products fall, and much of this has to do with a slowdown in construction activity in China.
The Purchasing Managers’ Index (PMI) in China has also been indicating a slowdown in the manufacturing sector as well but again that doesn’t seem to worry the RBA too much.
If construction activity keeps slowing down in China then demand for iron ore and copper for example will fall and consequently the prices for these will also fall. This is actually happening now.
But don’t take my word for it, here is an extract from a recent article in the LA Times:
“The property sector is a huge employer and now accounts for about one-fifth of China’s economic output. Local governments are heavily dependent on land sales to fund public services and to pay off municipal debt. Banks issued record numbers of home mortgages and construction loans, whose collateral is real estate that’s now falling in value.
A real estate crash would reverberate well beyond China. The building binge helped fuel a global boom in raw materials including Brazilian iron ore and Chilean copper. And it would hobble an economy the rest of the world was counting on for new consumers and investment opportunities.”
Back in April 2011 in a post entitled The China property bubble and an economy hooked on growth I wrote:
“If the Chinese property sector was unable to be cooled gradually then a rapid decline in prices and construction activity would slash the demand for commodities like iron ore and copper.”
We appear to be on the verge of that prediction possibly being proved correct.
So what do we know for sure? Firstly we know construction activity is slowing in China. Secondly we know apartment prices are falling across the major cities and thirdly we know prices for commodities such iron ore & copper are trending downwards.
So relying on the Chinese economy to shield the Australian economy from the economic slowdowns in Europe, the United States & Japan is a pretty foolish approach in my opinion.
Over the last few years too much time has been spent on gloating about the commodities boon and almost no time spent on working out how the economy can become more diversified.
The tourism sector is in the doldrums, the manufacturing industry continues to shrink and is on a long term path to oblivion. The housing market appears set to remain soft for the foreseeable future and there is no significant technology sector in Australia – technology is largely imported.
But maybe the demand for commodities from China (and India) will be able to offset weaknesses in other areas of the economy? Maybe Ken Henry (ex-Treasury Head now working for Gillard) was right when he predicted a golden economic age for Australia?
But before investors become too confident that China will provide a shield for the Australian economy it’s worthwhile to listen what Jim Chanos has to say about the property market in China via this video clip from CNBC.
When Chanos first started talking about a property bubble in China a few years back many China market watchers dismissed his claims out of hand. But recently more people are paying attention to what he is saying and if he is right, then the Australian economy will be in for a tough few years.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jpSearch terms: jim chanos 2012, australian property bubble, jim chanos, jim chanos china 2012, jim chanos china bubble ppt