The China Bubble..
China has reached a critical impasse that can only end badly for those countries dependent on exports to China.
Several factors will reach a climax in the next few years.
Their major problem is that they hold an enormous surplus of other nations currencies. (mostly US dollars)
This is extremely dangerous.. There are two main reasons for this surplus..
1. China has been exporting billions of hard products and accepting a billion paper IOUs in return!
These papers (US dollars) are useless in domestic China. They can't pay wages or buy anything local in a foreign currency. The only use for them is to pay for imports or imported services.
A fundamental definition that many people forget is that TRADE means exchange of GOODS.. Exporting billions of goods MUST be matched by Importing billions of goods! Not matched by billions of IOUs.
The IOUs (US Dollars) are supposed to be just temporary 'place holders' to balance the books.. The placeholders - in and out - should hover around zero.
Hording placeholders is like hording Zimbabwe currency! If anything goes wrong in Zimbabwe, you are bankrupt.
The worlds financial markets are very worried about the future of the US dollar and China is starting to panic over the trillions of them that it is stuck with.
2. For years, China has artificially held down the value of their currency. They did this to give them an unfair advantage in the export markets.
Holding down your currency by 10% is the same as bribing your customers with a 10% personal tip - it is akin to 'dumping' or selling below cost.
This 'cheating' had had an unforeseen and dangerous consequence. Any currency sitting below it's real value attracts the sharks of the financial world. The currency 'ETF' traders will pour funds into such a currency while it is low and - when it inevitably returns to a higher value, they will make a killing by selling off those IOUs at the higher price.
China saw this coming years ago.. They realized that as soon as they bow to international pressure and raised the value of their currency, the ForEx sharks will move in and strip a zillion dollars out of their economy! Their only defense was to invest that huge amount of money in something that would be a permanent asset and would produce a return higher than the percentage they were going to loose.
The only thing that could possibly meet those 'high return' requirements was a housing and property boom.
So, like Ireland, China poured that foreign money into a housing and property bubble.
Like Ireland, they now have whole cities of empty houses and apartments. They were hoping the average wage of the Chinese worker would continue to rise at the 2006 rate and those workers would be able to buy all these empty houses and thus justify the bubble.
Of course, the GFC ended that wage spiral and there is now no chance those workers will ever afford these houses.
China is now trying to 'buy time'.. They are now building other things of permanent value like bridges and ports to keep the illusion of perpetual growth alive. They prevent their own media from reporting on these issues. Many academics in China have no idea what is happening, they will write-in to articles like this and deny there are any empty suburbs or cities. "I live here - I should know, there are NO empty cities!" They are stunned when they see these cities on 'Google World' for themselves. (Thank you Google)
The obvious problem for Australia and those other countries that have half their economy based on exports to China is that this is all unsustainable! The building boom in China is quietly being scaled down, new cities are being abandoned on the drawing board.. (thank goodness) But mineral imports have not yet declined! (They are contracted and can't be quickly canceled.) This means China is stuck with growing stockpiles of these import commodities like iron ore. Having a stockpile naturally mean it won't be just a minor reduction in orders but could be a complete pause! That would be a disaster for Australia..
The entire financial world is waiting to see how this all comes unstuck.
Another serious danger to Australia comes from the inevitable price-war between the various suppliers of iron ore and coking-coal..
Brazilian mining giant 'Vale' is the worlds largest supplier of iron-ore and is currently purchasing many of the best deposits of iron ore in the world - notably in Africa.
Ominously, Vale announced in August 2010 that it was cutting its price in response to the fall in demand from China. Vale says that in-spite of this price cut, they intend to double their revenue [in this year.]
It isn't hard to see (except for the Australian politicians and media) what Vales intention is. To achieve a doubling of revenue, they need to take much of our share of the Chinese demand.
Now that the annual negotiated price has been replaced by a quarterly 'bargained' price, the iron-ore market is now open to sudden discount wars.
Subsequent to the jailing of Australian 'Iron-ore' executive Stern Hu, China is very angry at "Australias" attempt to bribe and corrupt the pricing negotiation process - China would eagerly cut Australias share of the market.
If you exclude the 'export to China' figures, Australia is already in recession.
When this madness is terminated, Australia could face a three year collapse of its mining export bonanza.
Australias credit rating is sustained only by its export figures and will be downgraded. This will mean the banks will have to pay more for their funding and mortgage rates will have to rise.
Simultaneously, mining employment will fall and unemployment will rise, average wages will decline and many home owners will find themselves unable to pay. This will force a small increase in the numbers of foreclosures.
A thousand financial advisers have been warning that Australias housing market is overvalued and that there will be a correction and a likely Foreclosure wave. The first few Foreclosure signs that go up will trigger a panic attack and 10,000 people will say "I told you so".. It will probably be a self-fulfilling disaster.
As an example of what will happen when mining employment declines..
Before the mining boom, Electricians in Oz were "a dime a dozen".. The competition forced their 'hourly charge rate' to zero.. They (we) were only able to survive on the "copper margin" (the difference between what we paid for the copper and fittings and what we could charge for them - the retail price of those components.) In other words, if we wanted the contract, we could not charge anything for our time.
It was very hard to survive and maintain our vehicles.
When the mining boom hit, half the electricians "headed west" and we were no longer "dime a dozen" - we could once again charge for our hours..
If the mining boom stops - all those Electricians will return east and they might again have to survive on the "copper margin".
Average wages WILL obviously decline and many home owners will be have to foreclose.
* 23/Dec/2010 - From the 'China Daily' - "Premier Wen Jiabao sees China's growth as "unstable, unbalanced, uncoordinated and ultimately unsustainable"
* 30/Dec/2010 - From the 'Shanghai Daily' - "It's only a matter of time before China's housing bubble bursts!"
* 22/Jul/2011 - From Max Ward - a regular contributor..
"Chinas massive move into R&D investment and subsequent global export of Hi-Tech product is an attempt to solve two severe problems.
1. After years of massive Trade imbalance, China is the sorry owner of over a trillion USA 'IOU's (dollars). These can't be used internally, they can only be used to import commodities from countries that will accept these IOUs.
They have previously used those commodities to build empty cities and bridges to nowhere. They now realize they need to only import commodities that can be value-added and re-exported. And that requires massive investment in R&D.
2. China is loosing confidence in the USA as a bottomless export market. They are planning to use these R&D projects to export hi-tech items like Thorium reactors to the whole world.
China is planning to dominate the global Hi-Tech export market in all areas critical to a Nations development. Eg. GM crops; Cheap energy; Fresh water equipment; cheap vehicles.. Issues like Patent violation and 'fair pricing' are irrelevant.