5 ms·

It's pretty interesting to see how intertwined China is with Australia. If you ever want to short China, your best bet is to target Australia which already has

by jakarta 16y ago

It's pretty interesting to see how intertwined China is with Australia. If you ever want to short China, your best bet is to target Australia which already has a bit of a property bubble, mining companies that are dependent on Chinese demand, and a currency that is buoyed by commodity prices. If China is indeed a bubble (at least in the medium-term) Australia is going to experience a world of hurt.

nl 16y ago
If China is indeed a bubble (at least in the medium-term) Australia is going to experience a world of hurt. Yes, but... Australian is a commodity exporter. If China is a bubble, then yes, Australia will be hurt unless another country (US/India/Japan/Korea) picks up demand. Also, it's not a property bubble when there are less houses than people who want them. Because the population growth rate in Australia is (comparatively) high for a developed country we have high intrinsic demand for new housing.
- jakarta 16y ago
  Do you realistically expect the US, Japan, or Korea to somehow fill the gap if China suddenly drops its demand for Australian commodities? India might pick up some of the slack, but I would bet against it. Household debt / disposable income in Australia is 157% versus 133% for the US shortly before the financial crisis. That level of debt combined with ever increasing home prices should create a pretty volatile situation.
  - nl 16y ago
    Do you realistically expect the US, Japan, or Korea to somehow fill the gap if China suddenly drops its demand for Australian commodities? Probably not, but it depends. If you think the "China bubble" is because of Chinese domestic demand (ie, construction in China) then it will be hard to replace. If you think it is because of Chinese exports then it's possible another country could substitute. Personally I reject the idea of a Chinese bubble altogether. Household debt / disposable income in Australia is 157% versus 133% for the US shortly before the financial crisis. It would be great if that was lower, but there are reasons for it. It's mainly because of high house prices. Unlike the US we don't have a housing bubble, because of our increasing population. Average household debt is around 20% of household assets (http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features60March%202009 http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Fe...). While the asset prices (ie houses) keep increasing that level of debt remains serviceable.
    - wisty 16y ago
      Yeah, but if the average Australian owes 1.6 times their annual salary, and house prices are 6X income, and they also have 2 years income locked into superannuation for their retirement (go boomers!), then things could go bad. Ask an American, English, Irish, Greek, Icelandic, or Japanese poster.
      - nl 16y ago
        I don't understand what you are saying, but it seems to me you are confusing cause and effect. Yeah, but if the average Australian owes 1.6 times their annual salary, and house prices are 6X income, and they also have 2 years income locked into superannuation for their retirement (go boomers!), then things could go bad Yes, if you have a high level of debt and things go wrong then it's not a great place to be. But there needs to be something else to make things "go bad", and for it to be a significant problem it needs to happen quickly, before people can adjust their debt levels based on economic signals like an increasing unemployment rate. A very sudden collapse in commodity demand from China could cause a crisis like that, but a sudden drop like that seems unlikely to me. (If you disagree, explain what you think happens in China to cause such a rapid change) A more likely scenario seems to be a slow decrease in demand, occurring over many years. A slow slowdown in demand allows people to change their debt levels, and while individuals may have problems it is unlikely to cause a huge crisis beyond a higher unemployment rate. Given Australia got through the biggest financial crisis since the 1920's in pretty good shape I think automatic pessimism is unfounded.
        barkingcat 16y ago
        The two things that could cause Chinese demand to collapse is war, or a people's revolution. Both will be very very bloody, and you would worry about other things than just property value or annual salaries. Be afraid for your life, no matter where on the globe you live. As a Taiwanese, I always feel that tension on the bead, that possibility that either World War 3 or the world's largest and bloodiest popular uprising would erupt before my eyes, perhaps on the back of some trivial issue, like denying China the ore that it wants.
  - caf 16y ago
    The debt ratios aren't directly comparable, because there are significant differences in the way housing finance is conducted in the two countries. Unlike the US, Australian house loans are never non-recourse. This means that borrowers tend to continue to pay them off even if the notional value of the asset drops below that of the outstanding debt - they can't just mail the keys back to the bank and get out of the loan. Most housing finance in Australia is provided through one of the "big 4" very large and heavily regulated banks - small regional banks are not a significant portion of the Australian market. Australian housing loans also tend to be variable-rate, as opposed to the fixed-rate that's the norm in the US.
- wisty 16y ago
  The problem with commodities like iron is they mean-revert. Iron ore traditionally sells for under 40 cents. It's over 160. There is a big price bubble, because there was such a large spike in demand (thus a shortage, so customers bid the price up). But if demand drops, those mining trucks can't just sit idle. They run 24 hours a day, whether they are raking in money or just eking out a profit. The same goes for the 2 mile trains, container ships, loaders, and so on. Quantities won't drop a lot, so price will, right down to the cost of production. Once it hits the cost of production, companies will start scrapping trucks, but that's a very bad way to lower quantities.
  - nl 16y ago
    Yes, this is a good point. But I don't think the demand is going to stop (for a significant period of time anyway). While the Chinese standard of living keeps increasing their domestic demand is going to keep increasing. If their standard of living stops increasing then you'd have to question the stability of their government. If that happens then the world economy is probably screwed anyway.
- justsee 16y ago
  Also, it's not a property bubble when there are less houses than people who want them. Because the population growth rate in Australia is (comparatively) high for a developed country we have high intrinsic demand for new housing. It is quite simply a myth that there is a housing shortage in Australia. This idea has been conceived and perpetuated by vested interests in the property market in Australia, particularly the Housing Industry Association (HIA). A recent article does a good job of exposing this:"Housing industry's missing persons report pure fiction" http://is.gd/eXZT5 http://is.gd/eXZT5 It's not the first time this kind of tactic has been applied either: in the lead up to the property crashes of the US and UK the press ran numerous stories about housing shortages. These quickly turned to stories of housing gluts after the bubble popped. Look to the Australian census data of 2001 and 2006 and you'll see we've been building at an increased rate, and have an increasing number of empty houses on the books (around 800 000 in 2006). A contrarian site gathers a bunch of this information here: http://bubblepedia.net.au/tiki-index.php?page=HousingShortage http://bubblepedia.net.au/tiki-index.php?page=HousingShortag...
mrtron 16y ago
I don't see how China's demand for commodities could be a bubble. They are building in huge volumes, but they have a huge volume of people. There is a middle class developing. Check out Hans Rosling's talks about it. There may be a temporary bubble in the stock market, but China is undergoing an incredible shift towards becoming North American in every way. Beijing is the best example of this - the entire city has been bulldozed and redeveloped in a North American big box way. Shanghai is even further 'ahead'. Traditionally Chinese have been very conservative with spending, preventing quick economic growth. Credit cards are almost non-existent. You pre-pay your bills, even electricity! But for some reason - perhaps the Internets media influence, perhaps the one child policy, people are now spending money quickly. Starbucks is extremely popular and more expensive than in Toronto, NYC or SF! For the price of a coffee you could easily get a great meal with a few drinks, yet coffee shops are filled. If all of it is a bubble - it is so firmly entrenched at ground level that the momentum of this bubble will burst through and last for decades. New industries are developing rapidly. The insurance industry was almost non-existent a decade ago, and is growing quickly in different ways there. One thing is part of what is fuels the growth is international companies spending a lot of money trying to establish new business in China. These companies are risking money and bringing expertise into a really unknown market and often losing money. China in the end benefits as they just sit their with their vast market and allow foreign companies to try to create new industries. If anything starts doing really well, the government could always regulate that industry and take it over themselves. I don't see anything stopping both China and India both developing a large middle class. That will snowball growth for decades. Premium brands will likely dominate - these folks want iPhones and Mercedes. I think this Australian iron ore example is just the beginning of the scale at which we will see commodities shifting to China. I expect timber to happen at an enormous scale as their foresting practices seem quite unsustainable.
- btilly 16y ago
  The first problem that China has right now is that government policy has made it easier to bring money in than to take it out. This has caused a significant asset bubble. If that asset bubble pops, it will be painful. That's exactly what happened to the Japanese juggernaut that everyone was scared about 20 years ago. The longer term problems are demographic. The one-child policy means that the upcoming generation is smaller than the previous. Their work-force will soon be shrinking. Furthermore many parents chose to abort girls to make their one child a son. But a generation with a significant surplus of men is bound to have interesting social problems. If I had to bet, I'd bet that 30 years out we'll be hearing more about India than China.

by jakarta 16y ago

nl 16y ago

If China is indeed a bubble (at least in the medium-term) Australia is going to experience a world of hurt. Yes, but... Australian is a commodity exporter. If China is a bubble, then yes, Australia will be hurt unless another country (US/India/Japan/Korea) picks up demand. Also, it's not a property bubble when there are less houses than people who want them. Because the population growth rate in Australia is (comparatively) high for a developed country we have high intrinsic demand for new housing.

jakarta 16y ago
Do you realistically expect the US, Japan, or Korea to somehow fill the gap if China suddenly drops its demand for Australian commodities? India might pick up some of the slack, but I would bet against it. Household debt / disposable income in Australia is 157% versus 133% for the US shortly before the financial crisis. That level of debt combined with ever increasing home prices should create a pretty volatile situation.
- nl 16y ago
  Do you realistically expect the US, Japan, or Korea to somehow fill the gap if China suddenly drops its demand for Australian commodities? Probably not, but it depends. If you think the "China bubble" is because of Chinese domestic demand (ie, construction in China) then it will be hard to replace. If you think it is because of Chinese exports then it's possible another country could substitute. Personally I reject the idea of a Chinese bubble altogether. Household debt / disposable income in Australia is 157% versus 133% for the US shortly before the financial crisis. It would be great if that was lower, but there are reasons for it. It's mainly because of high house prices. Unlike the US we don't have a housing bubble, because of our increasing population. Average household debt is around 20% of household assets (http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features60March%202009 http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Fe...). While the asset prices (ie houses) keep increasing that level of debt remains serviceable.
  - wisty 16y ago
    Yeah, but if the average Australian owes 1.6 times their annual salary, and house prices are 6X income, and they also have 2 years income locked into superannuation for their retirement (go boomers!), then things could go bad. Ask an American, English, Irish, Greek, Icelandic, or Japanese poster.
    - nl 16y ago
      I don't understand what you are saying, but it seems to me you are confusing cause and effect. Yeah, but if the average Australian owes 1.6 times their annual salary, and house prices are 6X income, and they also have 2 years income locked into superannuation for their retirement (go boomers!), then things could go bad Yes, if you have a high level of debt and things go wrong then it's not a great place to be. But there needs to be something else to make things "go bad", and for it to be a significant problem it needs to happen quickly, before people can adjust their debt levels based on economic signals like an increasing unemployment rate. A very sudden collapse in commodity demand from China could cause a crisis like that, but a sudden drop like that seems unlikely to me. (If you disagree, explain what you think happens in China to cause such a rapid change) A more likely scenario seems to be a slow decrease in demand, occurring over many years. A slow slowdown in demand allows people to change their debt levels, and while individuals may have problems it is unlikely to cause a huge crisis beyond a higher unemployment rate. Given Australia got through the biggest financial crisis since the 1920's in pretty good shape I think automatic pessimism is unfounded.
      - barkingcat 16y ago
        The two things that could cause Chinese demand to collapse is war, or a people's revolution. Both will be very very bloody, and you would worry about other things than just property value or annual salaries. Be afraid for your life, no matter where on the globe you live. As a Taiwanese, I always feel that tension on the bead, that possibility that either World War 3 or the world's largest and bloodiest popular uprising would erupt before my eyes, perhaps on the back of some trivial issue, like denying China the ore that it wants.
- caf 16y ago
  The debt ratios aren't directly comparable, because there are significant differences in the way housing finance is conducted in the two countries. Unlike the US, Australian house loans are never non-recourse. This means that borrowers tend to continue to pay them off even if the notional value of the asset drops below that of the outstanding debt - they can't just mail the keys back to the bank and get out of the loan. Most housing finance in Australia is provided through one of the "big 4" very large and heavily regulated banks - small regional banks are not a significant portion of the Australian market. Australian housing loans also tend to be variable-rate, as opposed to the fixed-rate that's the norm in the US.
wisty 16y ago
The problem with commodities like iron is they mean-revert. Iron ore traditionally sells for under 40 cents. It's over 160. There is a big price bubble, because there was such a large spike in demand (thus a shortage, so customers bid the price up). But if demand drops, those mining trucks can't just sit idle. They run 24 hours a day, whether they are raking in money or just eking out a profit. The same goes for the 2 mile trains, container ships, loaders, and so on. Quantities won't drop a lot, so price will, right down to the cost of production. Once it hits the cost of production, companies will start scrapping trucks, but that's a very bad way to lower quantities.
- nl 16y ago
  Yes, this is a good point. But I don't think the demand is going to stop (for a significant period of time anyway). While the Chinese standard of living keeps increasing their domestic demand is going to keep increasing. If their standard of living stops increasing then you'd have to question the stability of their government. If that happens then the world economy is probably screwed anyway.
justsee 16y ago
Also, it's not a property bubble when there are less houses than people who want them. Because the population growth rate in Australia is (comparatively) high for a developed country we have high intrinsic demand for new housing. It is quite simply a myth that there is a housing shortage in Australia. This idea has been conceived and perpetuated by vested interests in the property market in Australia, particularly the Housing Industry Association (HIA). A recent article does a good job of exposing this:"Housing industry's missing persons report pure fiction" http://is.gd/eXZT5 http://is.gd/eXZT5 It's not the first time this kind of tactic has been applied either: in the lead up to the property crashes of the US and UK the press ran numerous stories about housing shortages. These quickly turned to stories of housing gluts after the bubble popped. Look to the Australian census data of 2001 and 2006 and you'll see we've been building at an increased rate, and have an increasing number of empty houses on the books (around 800 000 in 2006). A contrarian site gathers a bunch of this information here: http://bubblepedia.net.au/tiki-index.php?page=HousingShortage http://bubblepedia.net.au/tiki-index.php?page=HousingShortag...

mrtron 16y ago

I don't see how China's demand for commodities could be a bubble. They are building in huge volumes, but they have a huge volume of people. There is a middle class developing. Check out Hans Rosling's talks about it. There may be a temporary bubble in the stock market, but China is undergoing an incredible shift towards becoming North American in every way. Beijing is the best example of this - the entire city has been bulldozed and redeveloped in a North American big box way. Shanghai is even further 'ahead'. Traditionally Chinese have been very conservative with spending, preventing quick economic growth. Credit cards are almost non-existent. You pre-pay your bills, even electricity! But for some reason - perhaps the Internets media influence, perhaps the one child policy, people are now spending money quickly. Starbucks is extremely popular and more expensive than in Toronto, NYC or SF! For the price of a coffee you could easily get a great meal with a few drinks, yet coffee shops are filled. If all of it is a bubble - it is so firmly entrenched at ground level that the momentum of this bubble will burst through and last for decades. New industries are developing rapidly. The insurance industry was almost non-existent a decade ago, and is growing quickly in different ways there. One thing is part of what is fuels the growth is international companies spending a lot of money trying to establish new business in China. These companies are risking money and bringing expertise into a really unknown market and often losing money. China in the end benefits as they just sit their with their vast market and allow foreign companies to try to create new industries. If anything starts doing really well, the government could always regulate that industry and take it over themselves. I don't see anything stopping both China and India both developing a large middle class. That will snowball growth for decades. Premium brands will likely dominate - these folks want iPhones and Mercedes. I think this Australian iron ore example is just the beginning of the scale at which we will see commodities shifting to China. I expect timber to happen at an enormous scale as their foresting practices seem quite unsustainable.

btilly 16y ago
The first problem that China has right now is that government policy has made it easier to bring money in than to take it out. This has caused a significant asset bubble. If that asset bubble pops, it will be painful. That's exactly what happened to the Japanese juggernaut that everyone was scared about 20 years ago. The longer term problems are demographic. The one-child policy means that the upcoming generation is smaller than the previous. Their work-force will soon be shrinking. Furthermore many parents chose to abort girls to make their one child a son. But a generation with a significant surplus of men is bound to have interesting social problems. If I had to bet, I'd bet that 30 years out we'll be hearing more about India than China.