Will China be the next financial domino to fall? That is a question which was once unthinkable, but which is now being openly discussed, with serious potential consequences for Australia.
Officially, China is rock solid. Its government claims to have pricked a property bubble with tighter controls on its banks, and to have switched the focus of manufacturing from exports to internal consumption.
Unofficially, there are doubts about whether the Chinese Government is telling the truth about the health of the country’s economy, and whether it is too late to prevent a property and banking collapse of the sort which damaged the U.S., and has now spread to Europe.
No-one should be surprised that such questions are being asked because the world has become tightly connected economically over the past 30 years thanks to the theory of globalisation, a theory which is now being sorely tested.
Much of China’s rapid growth is a result of selling manufactured goods to Europe and the U.S. Deep troubles in both those export markets must have an effect on factories dedicated to satisfy western-world consumer tastes.
The real problem, and one that has worried some outsiders for several years (including me) is whether you can believe Chinese statistics, given that they emanate from a country built on a deeply-flawed political concept, communism, which it is argued has embraced parts of the capitalist system.
There are two issues at the core of this dual-structure model. Communism simply doesn’t work, and if you believe that it can successfully morph into a form of capitalism then you will be as disappointed as the first person who tried to mix oil and water.
As Europe slides into a deep recession, and the U.S. hobbles along, the most important job in business today is testing the truth about Chinese statistics, and the only way to do that is the hard way – bypassing the government and counting containers.
That is precisely what some of the world’s smartest fund managers are doing. Having profited handsomely over the past 12-months from betting against China (one “China short” fund has gained 50 per cent this year), bigger bets are being placed on a continued slide, a step which requires accurate information of the sort not coming from the government.
What the funds are doing is sending their own researchers to China with the brief of standing outside ports, and at factory gates, counting the movement of cargo, trucks, and trains.
It sounds simple, but it is effective and a variation on one of the best ways to measure retail activity – count the empty boxes in the communal garbage area of a shopping centre because while you can’t see what’s going into every shop, you can count the empties cartons coming out.
The fact the investment banks are taking such drastic steps as box counting is a measure of the concern in financial circles that all is not well in China, and that a deflating property boom is inflicting the same damage as there as it has in the U.S., Europe, and probably Australia.
Globalisation is one force which has produced an inter-connected world, and it looked good for a while. A credit avalanche was another, with most countries (and consumers) borrowing far more than they could afford to service, let alone pay back in full.
This has led to a period which might one day be called The Great Hangover. Just as everyone borrowed too much at the same time because there seemed to be a never ending boom, now everyone is trying to retire debt at the same time, triggering a deflationary spiral of falling prices, which leads to falling demand, which leads to trouble.
China, so far, has been the odd man out, seemingly oblivious to the rapid onset of the western world’s crisis, but having been a leading player at the credit party (and having openly admitted to a new-found love of capitalism), it cannot evade being caught up in the after-party blues.
A combined manufacturing and property crisis looms in China where apartments have been selling for up to 30-times average annual income, three-times the peak of the western-world’s boom.
Letting the hot air out of a bubble that size will not be easy, and perhaps impossible without bursting the balloon.
That’s why all eyes are on China as 2012 rolls around because it has the hallmarks of the next domino to fall in a process which started with the sub-prime crisis in the U.S. and has rolled around the world like a giant bowling ball, skittling economy after economy.
Australia can only watch and wait, but it would be wise to make preparations for a troublesome 12-months ahead.