Today we’ll jump on board our old hobby horse, China, and enjoy a leisurely ride. We’ll cover ghost cities gone bust, stimulus options, iron ore and the IMF. After reading, you’ll realise why we expect sharp share price falls ahead .
We say that because China’s own economic restructuring will define Australia’s direction over the next few years. And although we’ve made the point before, we’ll make it again: China’s rebalancing hasn’t even started yet. For example, the property market is still booming.
‘China’s June new home prices rose in all but one city, led by the biggest metropolitan centers and underscoring Premier Li Keqiang’s struggle to rein in speculative investment even as the economy cools.
‘Prices climbed in 69 of the 70 cities the government tracked last month from a year earlier, the National Bureau of Statistics said in a statement today, matching the data in May. The southern business city of Guangzhou posted the biggest increase with a 16 percent advance from a year earlier. Prices climbed 13 percent in Beijing and 12 percent in Shanghai. All three cities had their biggest gains since the government changed its methodology for the data in January 2011.’
Meanwhile, because of the economic slowdown (driven by an increasingly inefficient credit bubble, not by policy) everyone is calling for more stimulus. But it’s no wonder China’s Finance Minster Lou Jiwei keeps pushing back on stimulus rhetoric. It’s the last thing China’s economy needs right now. To pursue more stimulus spending would be insane.
Even the IMF, generally late to the party on most issues, has just come out and issued a dire warning to China. Not that China’s really listening though, as the Telegraph reports:
‘The Fund said wealth products (WMP) and trusts – a disguised second balance sheet of banks, worth $2 trillion – "could over time evolve into a systemic threat to financial stability". A sudden loss of confidence could "trigger a run" and set off "a severe credit crunch".
‘"As of now, the authorities still have sufficient tools and fiscal space to address potential shocks. However, failure to change course and accelerate reform would increase the risk of an accident or shock that could trigger an adverse feedback loop," it said. China has been warned.
‘Beijing’s replied dismissively that "vulnerabilities were well under control". It said the fast growth of wealth products and trusts were a healthy sign of "market-based intermediation". ‘Any risks were "manageable". Bad loans in the banking system "remained low and Chinese banks had some of the highest capital and provisioning ratios in the world". Do you laugh or cry?’
Rio Tinto and BHP are heading into this maelstrom with guns blazing, which you can probably get away with doing when you’re amongst the world’s lowest cost producers of iron ore. They are producing more iron ore as each year passes and will be doing so up until around 2015 as prior expansion projects kick in.
But we wouldn’t like to be an iron ore producer a bit higher up on the cost curve. They will be in all sorts of problems when China’s credit fire starts to burn itself out. The iron ore price is currently around US$130, a very healthy level. We expect it to be under US$100 by the end of the year.
Ordos, China’s famous ghost city, may well just be the canary in the coalmine. Bloomberg reports that the city has gone ‘bust’. Below is a photo, taken on 13 July, showing half-finished apartment blocks in the city. The ones that are finished are largely empty. What a masterpiece of central planning.
There’s not much more to say. Unless it restructures now, China’s economy is toast. Burnt toast.
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From the Archives…
The Agonists and the Ecstasy of the Financial Market
12-07-13 – Dan Denning
A Two-Faced Shock for the Australian Economy
11-07-13 – Dan Denning
Asiana Boeing 777: Lifesaving Defence-Tech ‘Miracle Materials’ in Action
10-07-13 – Byron King
Interest Rates: Something Wicked This Way Comes
9-07-13 – Bill Bonner
The End of a Share Market Correction… or the Beginning?
8-07-13 – Dan Denning