The Debt Limit In China

The Crash That's Taking A While

For the better part of this decade so far, there has been talk that China and its property bubble and ghost city would come to a crash-landing of sorts instead of a much mooted soft-landing. One of the things about these different landings as described by economists is that nobody really manages a 'soft-landing', and those that appear to be soft-landings usually involve kicking the can down the road through stimulus spending. Theses partly why we are beset with the feeling that ever since the GFC of 2008, we've seen this before and China hasn't exactly blown up and crashed on the tarmac so  things likely are going to be okay. This is classic normalcy bias wherein we're inclined to think things are going as normal even when things are wildly spinning away from normalcy.

Just exactly how well or unwell China is doing is up for a lot of debate. The cracks started to show last year around May when companies started to default on their bonds, but "a Mysterious Mr. X" would altruistically save the day by buying out the debt position. Most would have read that Mr. X to have been an agent of the Chinese central bank, not wishing to start a credit crisis or a bank run, stuck a fingering the hole in the dyke. All the same, the Chinese government has been announcing that it has been growing at a pace of well over 7% for some years now, so we tend to get lulled into a sense of false security. After all, if China is growing at 7%p.a., it can surely pay off all its debts unlike the first world nations that can't seem to muster 1% growth.

And so, we come to this interesting video:


Anne Stevenson-Yang's presentation essentially kicks the rungs out of everybody's perception of the Chinese economy. It's much worse than one would think and it's in too much debt to do any heavy-lifting for the world. -2% on consumer spending? Zero growth? Saturation debt and no new credit as most of the credit issued is used to rollover old debt? I don't know about you, but she sure talks up a scary set of figures, and she may well be right. That Bob Davis isn't exactly doing a good job of refuting her well-researched points - he sounds more like he is trying to hose down the burst of bad news erupting from her research.

That is some badness she's painting there. It's certainly a far cry from the rosy, "China is growing at 7% p.a. rate" story the world has been swallowing hook-line-and-sinker for some years. As Ms Stevenson-Yang notes, that figure is what we might call "aspirational" in the sense that when the politburo announces the GDP growth, the industry uses it as a target benchmark. It most likely has no bearing to what is happening in reality at all.

For some time it's been postulated that China has been overly optimistic (we won't say lying, because they're aspirational figures, not measured ones), and so the real economy in China is not as large as people think it is based on the yearly announced figures. So China right now might just be a victim of its own PR success, with not enough of a developed economy to do the kinds of lifting through its consumer spending. This would explain the static non-growth in consumer spending figures Ms. Stevenson-Yang has been able to capture through her research.

And so property prices are sagging and commodity prices are falling and state-owned-enterprises are having a devil of a time paying of debts but they keep on making stuff because they need to keep making stuff, regardless of how little it returns. The ramification for Australia is frightening, for Australia has been riding a commodity boom on the back of China for better part of two decades, which explains how Australia hashed sustained economic growth for 22years.

That's all about to end.

The crazy thing is that what Australia and its people have done with the commodity bonanza is spent it and spent it big on housing. We earned this foreign currency and subsequently tried out-bidding one another for housing. Worse still, just as with the Dutch disease, the mining sector and its success, combined with the stampede toward real estate has hollowed out the economy. Manufacturing has totally been beaten out of Australia and handed over to Asia. We haven't grown a lot of industry to take the place of mining as an driver of the economy and have hitched our wagons to housing as the next engine for growth. Alarmingly, Australians have gorged upon debt so that private debt is at an alarming, historic high.

In short, we might have missed the full impact of the GFC, but that's only because China kicked the can down the road for us. When China undergoes its hard-landing, then of course there will be so many debt positions that will get unwound. As Ms Stevenson-Yang notes, at this point in time, the only question is whether it ends with a bang or a whimper. From the figures, it looks like it's going toe a bang and that would suggest the shock to the Australian economy is going to be substantial.

We can predict going back to the early 90's when the Australian dollar was US50cents, and unemployment sat closer to 10% than 5%. If the Coalition Government is still going to be banging on about surpluses then and trying their austerity measures, you can count on the RBA will be slashing interest rates right down to ZIRP. At that point, the GFC would have finally arrived on to our shores.