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The economy, the Chinese property market & Jim Chanos.

December 16th, 2011 · Greg Atkinson · 28 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.”

Source: RBA: Statement on Monetary Policy (November 2011)

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.”

Source: China’s housing bubble is losing air

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_jp

28 responses so far ↓

  • 1 Greg Atkinson // Dec 19, 2011 at 9:10 am

    A less gloomy outlook for the property market in China from the Seeking Alpha website:

    “People in China have the money and the desire to buy homes but have been restricted from buying because of these regulations. They are now taking a wait and see attitude.

    While the residential real estate sector is definitely slowing, pent up demand and lack of debt among homeowners will ensure a soft landing. However, the commercial side, which makes up 20 percent of China’s real estate sector, is starting to show signs of a bubble. Blocked by government restrictions on the residential side, developers are rushing into ill-conceived commercial projects.”

    Source: Is Chanos Finally Getting It Right On China?

  • 2 belinda // Dec 21, 2011 at 5:31 pm

    Here is how the media promote vested interests.

    In here, it’s for the HIA.

    Is there a body who regulates journalism that promotes such or involves itself in conflict of interest claims ?

    It should not continue.

  • 3 Biker // Dec 21, 2011 at 8:17 pm

    Belinda, you’ve nothing to worry about. If you’re correct, the ‘oversupply’ of existing homes must result in rents falling.
    This appears to have started:

    Michael Perusco’s comments on oversupply seem particularly relevant.

  • 4 Plornt // Dec 21, 2011 at 8:46 pm

    Some words of wisdom from Jim Rogers…

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 5 Stillgotshoeson // Dec 22, 2011 at 12:36 am

    This can not be good news either… We still have th likely situation now that even if the RBA do lower rates the banks will not be passing all if any of the rate drop.

    There is also the “underemployed” those casual/part timers that would like more hours but won’t be able to get them and others having existing hours reduced…

  • 6 Greg Atkinson // Dec 22, 2011 at 10:35 am

    You are right about the underemployed and this seems to be showing up in the ABS data regarding ‘worked hours’ which as I recall has been moving sideways or falling for some time. (I will try and find the link later)

    Small businesses have been hurting for a year or more and now we seeing S&P/ASX 200 companies issue profit warnings and/or talk about 2012 being a tough year.

    If unemployment does start to trend upwards then that this will really shake consumer & business confidence further.

    I have been expecting a downturn for a while and it might just be we are already in one now.

  • 7 Leigh // Dec 22, 2011 at 12:35 pm

    Gee, we seem to be a gloomy lot and perhaps that is fifty per cent of the problem. Yes, house prices may come down and yes unemployment may go up and it is a time for caution, but let’s not loose perspective. We seem to go overboard at any announcement. A quarter of a per cent cut in interest rates means around $70 a month difference in a 300 grand loan, if that is going to make or break the borrower they should not be in it and there are only about 2 million people with home loans in Australia and many of them have locked in rates. RBA mini moves just do not affect as many people as we think. Negative equity doesn’t mean a thing if you don’t have to sell. Unlike a margin loan, the bank does not ask for a top up of equity so hang on and prosper. If you can’t make repayments with rates at today’s levels you never will. I remember a 17% interest rate twenty years ago.
    Gerry Harvey of Harvey Norman said at the start of the GFC that lack of confidence was the biggest problem, well according to COMSEC 21/12/11 he has spent a million dollars buying shares in his own stores so at least he is putting his money and his mouth in the same place. Look around, it really isn’t so bad.


  • 8 Greg Atkinson // Dec 24, 2011 at 7:45 am

    Leigh actually I would say the problem has been that in many economies people have looked around, seen life was good & then borrowed a heap of money to keep the good times rolling. Happy people tend to vote their leaders back in so governments have been happy to borrow as well to prop up GDP numbers and avoid making any tough decisions. But it’s tough decision time now.

  • 9 Ned S // Dec 26, 2011 at 2:51 pm

    Seem to be plenty of unhappy people in Europe at the moment. The good old G20 Let’s unite to save the world attitude appears to have begun to wear a bit thin over there – With them getting into talking about stuff like whose national debt most deserves a dowgrade; And which country committed the biggest genocides close on 100 years and more ago.

    Plus the US economy still seems weak. China has indicated it will stimulate. Suppose one should try to check how? – Just to see how much benefit might or might not come Oz’s way.

    But sure, I’m convinced the risks to world growth are both high and real.

  • 10 Greg Atkinson // Dec 27, 2011 at 9:02 am

    Ned on the bright side all the bad news is almost out there it seems. A year ago or so when I dared to suggest the Chinese economy would slow most mainstream finance media types were on about how interest rates in Australia would surely rise and that we would struggle to deal with the ever expanding Chinese economy.

    Today most commentators accept the Chinese economy is slowing and that it might even have a ‘hard landing’. Europe is a debt mess but they have been there before & the U.S economy is struggling….again that has happened before. It isn’t the end of the world.

    But I hope that between 2012-2013 the base is formed for the next bull market during which economies will be mismanaged again leading to another bubble of some form and thus we will repeat the whole cycle again 🙂

  • 11 Stillgotshoeson // Dec 27, 2011 at 11:20 am

    Yes the bad news is mostly out there for all to see, it is still that many refuse to believe it will affect us here in Australia.
    They still believe that Australia is somehow different and will escape the worlds troubles.
    They believe falling interest rates are a good thing and beneficial.
    They believe our government can implement policy to counter any troubles that may flow from the Northern Hemisphere.
    Some even think that the extraordinary growth we have experienced over the last 20 years is the norm and will continue.

  • 12 Stillgotshoeson // Jan 2, 2012 at 8:55 pm

    So what do we think will happen in 2012 re: property, precious metals, unemployment, interest rates and the share market?

  • 13 Greg Atkinson // Jan 2, 2012 at 9:25 pm

    I am still recovering from my 2011 forecast! 🙂

  • 14 Lachlan // Jan 3, 2012 at 9:24 am

    The fundamentals are for much more monetisations to occur to cover refinancing, a staggering amount. The spigots are flowing now although no formal QE is announced. We did not have QE 1 and 2 so Ben and Co could quit here. So I would keep buying discounts on your favourite things and hold tight. Bought those NCMs today Shoes and hoping for another tranche at the next pivot down 27/28 should we go there. I think its a good chance but better to be safe and start here i think.
    I think the Iran situation is going to develop into a war with the escalation building last week or so tremendously.
    Britains highly leveraged poorly backed system may puke.

  • 15 Lachlan // Jan 3, 2012 at 10:31 am

    Greg and Shoes, anyone, I have a question. What will iyo be the effect on our stock markets if the AUD/USD breaks out into higher trading range with 1.25 or so topside.

  • 16 Greg Atkinson // Jan 3, 2012 at 10:42 am

    That’s a hard one to answer because it would depend on what was also happening…i.e why did the AUD head higher? Was it because the commodities boom kicked in again or because they started QEIII?

  • 17 Lachlan // Jan 3, 2012 at 11:35 am

    The initial stimulus would be an official easing announcement by the Fed to target US domestic.
    I’m not predicting the near term move on the currency either Greg but just following a few scenarios through in my mind to see how it all ends. Yeah it is complex. Hence my question. I like to see all the ideas on the table no matter how bullish or bearish.

  • 18 Stillgotshoeson // Jan 3, 2012 at 2:14 pm

    Some areas do very well, others do not.

    Personally speaking, if a sustained high dollar was to occur I would be out of a job, no if, but or maybe about it.

    Retailers (bricks and mortar) would suffer, they squeal now about online purchases from overseas vendors… those goods 20%+ cheaper again would be very impacting on those squealing retailers even more. There has been more and more articles on online retailing, more people are becoming comfortable with the idea.

    Tourism and hospitality are going to suffer too.
    Our resources (priced in USD would become even more expensive).

    $1.25+ for our dollar is not a far fetched proposition, I just think we are a few years away from seeing that.

    Received a Share Purchase Plan from MXR today Lachlan, might take up 1/2 the offer.

  • 19 Lachlan // Jan 3, 2012 at 4:40 pm

    Thanks fellas.

    The AUD/USD has given mixed signals recently such that I wonder what is going on there but nonetheless the prognosis is neutral from a price action view point imo. But we are going to see a sharp move once this range gives out also imo.

    What I hope to see is a trip into the eighties soon even if just a brief dip to keep the show centred around parity over a longer horizon.

    I see though that 1.20/1.30 area is no doubt possible any old time depending on the type of action we get from various central banks. I just wonder what exactly would prevail given that scenario.

    It may be important to see if China begins easing now that they have given at least a signal of sorts in that direction some weeks ago.
    Hardly Normals was a slow show when I visited there a week before Christmas. I asked them how it was going and they tried to sound upbeat but that was obviously a hard task. That was a coastal shop. Out west in the mining areas everyone is loaded….except farmers.

  • 20 Biker // Jan 3, 2012 at 5:26 pm

    Shoes, 3/01/2012: “$1.25+ for our dollar is not a far fetched proposition, I just think we are a few years away from seeing that.”

    Shoes, 1/11/2010: “Next year it falls over. Our dollar will be savaged.”

  • 21 Stillgotshoeson // Jan 3, 2012 at 5:35 pm

    More of that lack of comprehension from you Biker….

    Biker // Jan 3, 2012 at 5:26 pm

    Shoes, 3/01/2012: “$1.25+ for our dollar is not a far fetched proposition, I JUST THINK WE ARE A FEW YEARS AWAY FROM SEEING THAT.”

    Shoes, 1/11/2010: “Next year it falls over. Our dollar will be savaged.I have put it in caps for you

    The dollar rises and falls you moron…..

    Sorry Greg, out of line but sometimes one needs to state the obvious to Captain Antagonist

    Share market goes up and down, property goes up and down and precious metals go up and down. Yes our dollar is going to fall, it is also going to rise. Some think as high as $1.50 in the next few years.

  • 22 Biker // Jan 3, 2012 at 5:44 pm

    Amusing that you request predictions for the New Year without considering your own were laughably incorrect for 2011, Shoes.

    No need to SHOUT, son. You’re very angry, but try to contain your rage.

  • 23 Greg Atkinson // Jan 5, 2012 at 9:54 am

    I will write up an article over the next few days and outline some of my guesstimates for 2012. That way readers can have a giggle at my expense and not each others.

  • 24 Stillgotshoeson // Jan 5, 2012 at 10:08 am

    Greg Atkinson // Jan 5, 2012 at 9:54 am

    I will write up an article over the next few days and outline some of my guesstimates for 2012.

    I am still working on my “Random List” of stocks to put up and my views on what I think we could see this year.

  • 25 Trading Coach // Jan 10, 2012 at 2:02 pm

    The news had it that the US economy is picking up in December and people were not worried about spending some cash. But the European crisis is not over yet. I can’t help but think that the ripple effect won’t reach China and hit its property market and everything else.

  • 26 Greg Atkinson // Jan 10, 2012 at 2:45 pm

    China has worried me for more than a year and I have said for quite some time that the Chinese economy will hit a rough patch. From the data we are seeing now it looks like growth in China is falling back and I reckon it will fall below 7% this year if not further. Commodities prices for iron ore & coking coal have been falling for months; this will hit the Australian GDP numbers & export earnings this year.

  • 27 Greg Atkinson // Apr 10, 2012 at 12:52 pm

    Marc Faber appears fairly bearish regarding the outlook for the Australian economy and is quoted as saying recently:

    “If there is a meaningful slow-down in China, then obviously the Australian economy will suffer very badly,” he said.

    “I happen to think that the Australian economy will suffer regardless because we have a very elevated property market that has become unaffordable for a large number of people and we have already some cracks in the property market.

    “We have a very high household debt to GDP ratio so I’m not optimistic about the Australian economy.”


  • 28 Biker // Jun 17, 2013 at 5:37 pm

    Chinese credit bubble? (Fitch)

    “Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a ‘massive savings account that can be drawn down’ in a crisis…”

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