Why Australia Will Sink in China's "Quicksand" Economy Thursday, 24 November 2011 – Melbourne, Australia By Kris Sayce

Why Australia Will Sink in China's "Quicksand" Economy
Thursday, 24 November 2011 – Melbourne, Australia
By Kris Sayce

* Why Australia Will Sink in China's "Quicksand" Economy
* Three Things You Need to Know About Today's Market

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In today's Money Morning: Germany left holding the bonds... Cheerleaders v Common Sense - Common sense wins... Australia walking on quicksand... A plain old credit boom...

Why Australia Will Sink in China's "Quicksand" Economy

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.

[Ed note: if you want to know the impact of the bodged German bond sale on the markets, check out Murray Dawes' latest free video update here...]

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.

You can watch the Chanos interview here. So we won't repeat everything he said.

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.

P.S. Don't forget to check out Murray's latest free market update over at his YouTube channel. As he told me this morning, "If people were doubting the gravity of the situation before, they should be convinced now that things are getting very scary." Before you place another trade on the stock market, check out Murray's video here now...
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A warning call for Aussie stock investors

Just when you thought stocks were recovering after the recent sell-off…

New research shows that a BIGGER collapse in Aussie stock prices could be “dangerously imminent”.

Click here to get the facts, before it’s too late.

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Three Things You Need to Know About Today's Market
By Shae Smith, Editor, Money Morning

1: No one wants German bonds

Stocks in Australia are down again this morning. Why? Germany was flogging nearly 6 billion euros of 10 year bonds... and the 'take up' was just over half at 3.64 billion.

'This is nothing short of a disaster for Germany,' said managing director of Southwest Securities Inc, Mark Grant. 'If the strongest nation in Europe has this kind of difficultly raising capital, one shudders concerning the upcoming auction in other European nations.'

The failure to buy the nicknamed 'gold standard' German bonds is telling you something. No one has any faith in the market.

2: Aussie dollar dives... blame China for not working hard enough.

If you were planning on doing your Christmas shopping from American retailers this year, you may want to put those plans on hold.

The Aussie dollar was trading at US 96.83 cents this morning. So who's to blame? The poor German bond sales and China's preliminary manufacturing data.

But it could be worse. The PMI figure was just HSBC Bank's estimate of the PMI. It estimates the figure will plummet to 48, the lowest in over two years when the official figure is released next Thursday.

Any number below 50 suggests manufacturing activity is slowing. If HSBC data is on the money, it could be 'bye bye' to a controlled soft landing from Chinese central bankers... and 'hello' to a 'crash landing' instead.

3: Supermodels know more than your stock broker...

We know the market's in turmoil. Picking trades and planning your investments isn't easy.

But perhaps you should do what the supermodels do.

If that sounds crazy, check out this chart.

Gisele Stock index versus Dow Jones Industrial Average
Source: Stockerblog

If you'd invested in the publicly listed company's supermodel, Gisele Bündchen has been involved with... your stock portfolio would have outperformed the Dow Jones.

Since 2007 the 'Gisele Index' is up more than 47% compared to the Dow Jones Industrial Index. Companies she has endorsed in the past four years include, Volkswagon [PK: VLKAY], Polo Ralph Lauren Corp [NYSE: RL], Vivo Participacoes [NYSE:VIV], Newscorp [NASDOQ:NWSA], Procter & Gamble [NYSE:PG] and Disney [NYSE:DIS].

But if you're going to use models as a basis for stock choices, pick 'em carefully. Miranda Kerr, another model, is an ambassador for David Jones [ASX:DJS].

This morning it's down 4%. And DJ's has a lost a massive 49% since its peak 2007...

Shae Smith
Editor, Money Morning


Related Articles

Totally Standard Hyper-Inflation

Is There Any Upside for Gold Investors?

The Gold Bubble and China

What a 2,300 Year-Old Coin Reveals About Gold

Gold Investing Far From a Bubble

From the Archives...

The Onward March of the State
2011-11-11 - Kris Sayce

Lose a Shirt, But Gain a Wardrobe
2011-11-10 - Kris Sayce

Neither a Borrower Nor a Seller Be...
2011-11-09 - Kris Sayce

Roman or Zimbabwean
2011-11-08 - Kris Sayce

Lighting a Match to Inflation
2011-11-07 - Kris Sayce

For editorial enquiries and feedback, email moneymorning@moneymorning.com.au

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Time to prepare for “a dramatic, sector-wide plunge”

A lot of pro and novice investors reckon stocks in this sector are good value right now.

Because they’re cheaper after the recent sell-off. And because they offer strong dividend yields and SEEMINGLY good value.

It’s a tragedy in the making. Because, according to Greg Canavan, stocks in this sector are the riskiest shares to own on the ASX right now.

Get full details here.

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Question: how do you find the most exciting – and potentially the MOST profitable – small resource stocks in Australia?

Do you need a great stock broker? Do you need access to inside information the general public doesn’t have?

“No,” says Australia’s most travelled, independent resource analyst. “There’s only one thing you need to do…

Find out what it is here.

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