China – The BRIC About to Smash Through Australia’s Windscreen

The BRICs – Brazil, Russia, India and China – are supposed to be the upcoming economic boomers of our age. In fact, the BRICs theory was our first exposure to the world of economics. But now part of the story is looking a little shaky.

The ABC reports that ‘China’s National Bureau of Statistics says there are now more people living in the cities than the countryside for the first time.’

And Australia’s resources played a big part in making that happen. But can it continue? And is it for the better?

The answer to both is no. The combination of debt, government planning and over supply leads to a housing bubble in China, just as it did in the US. The laws of economics hold everywhere.

When the vast levels of construction taper off, the faster part of Australia’s two-speed economy will hit the brakes, sending us all into a spin. Here’s a big hint the construction boom in China is about to be exposed as a bubble: ‘The gain [in countryside income] was faster than for urban incomes for the first time since 1997′ the Chinese Bureau of Statistics reported. When income in the country is growing faster, it’s a sign that urbanisation has gone too far, too quick.

An important point to remember is that it only takes a lull in Chinese construction for Australia’s economy to experience a heart attack. And oversupply increases the likelihood of that happening. The articles, videos and reports of housing oversupply in China are too many to count.

What about house prices? In the US, it was a fall in house prices that triggered the collapse.

China is a little different in this respect.

In China, the debt problem lies with the government, not so much the private home buyer. It was the government that financed construction with debt, not the homebuyer that bought the house with debt. So prices are less of an issue. At least not to the same extent as they were in the US. Instead, it is a question of occupancy rates and property taxes. Without them, China’s overextended local governments will be in deep trouble.

There is another important point here for Australian investors. If the Chinese government experiences a debt crisis, it won’t be able to finance the construction that made up its stimulus efforts in 2008 and 2009. Australia will be left to figure out its own stimulus program if the world economy goes from paralysed to decaying.

Remembering that Keynesians like war for its economic stimulus effects, we might be joining the yanks over Tehran. Time to apply for Swiss citizenship.

Nickolai Hubble.
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Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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