03/08/2020 - 09:00

Big bubbles, woe, troubles

03/08/2020 - 09:00


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Countries are re-evaluating their relationship with China after a series of aggressive moves by the Asian giant.

Big bubbles, woe, troubles
There were massive protests in Hong Kong against China’s recent moves. Photo: Manson Yim

Bubbles can be hard to spot in their early stages, and some people don’t see them until they burst. Right now, there are so many bubbles forming it’s not hard to imagine the next crisis could perhaps involve something bigger than mere money.

Fintech, the curious amalgam of finance and technology that’s intruding into the traditional world of banking, is the immediate problem, particularly in Germany, where a major fraud has shaken the corporate world and government regulators.

A commodity close to many Australian investors, gold is exhibiting bubble-like qualities at the small end of the market, where overnight conversions are turning uranium, lithium, and vanadium explorers into gold companies because it’s the flavour of the month: a process that should carry a wealth warning.

China, however, could be the big bubble with the potential to damage everything in its orbit, including Australia, because a further deterioration in relations between Australia and its number one trading partner could turn the current stoush into something much worse.

The problem for a country with a relatively small economy (Australia) is knowing how to deal with a much bigger country that has embraced an opportunity to assume global leadership as the US turns in on itself, as has happened several times in the past.

Flashpoints in the Australia-China relationship include agricultural exports, tightening controls on Chinese investment, evidence of China buying influence in the Australian political process, concern about the spying capabilities of Huawei technology, and the full-blown Chinese takeover of Hong Kong.

Of those issues, the most concerning is the ease with which the Chinese government tore up a deal over the governance of Hong Kong with a one-country, two-systems structure unilaterally dumped in a crude demonstration of power.

But what China has done in Hong Kong, and in the nature of its new sedition laws that it argues can be applied anywhere in the world against anyone who criticises China, is shaping as a step too far.

Rather than expanding its economic and political influence unchecked, China is finding itself obstructed on multiple fronts as the rest of the world objects to its brash grab for power over its neighbours and trading partners.

India has been jolted into action by a Chinese land grab on the shared Himalayan border. Japan is bolstering its defences, and the US has all but declared China to be public enemy number one.

What this boils down to is the possibility that the age of ballooning Chinese expansion might be coming to an end, as countries that once welcomed Chinese investment close their doors.

The process of reviewing relations with China started with recent events in Hong Kong, with the new sedition law (designed to export China’s draconian internal securities control around the world) triggering a global reaction, including a review by Europe of its relationship with China.

Locally, Prime Minister Scott Morrison warned that Australians should take greater care when visiting China (and that includes Hong Kong) because of hostage risk, something that has already happened to two Canadians.

The question some people are starting to debate is whether China has expanded its influence as far as it can, as ‘friends’ become harder to buy.

It’s a fair question whether what’s happening is the pricking of a Chinese balloon, but there’s undoubtedly a sea change developing in the way the rest of the world sees China; and that’s a big issue for Australia, especially Western Australia.

Fintech folly

Fintech, another balloon mentioned earlier, lost a lot of air with the collapse last month of Wirecard, a German company once described as an excellent mix of banking and technology for the way it claimed to manage payments on behalf of its clients.

It took several years for the fraud at the heart of Wirecard to be exposed, but its collapse into insolvency will have global repercussions.

What appears to have happened is that a combination of slick marketing, the latest financial management technology, and conventional deception led to an illusion of success, with losses miraculously becoming profits and $US2 billion in bank deposits disappearing as if they never existed, which they didn’t.

Wirecard deceived some of the best and brightest in the global business community, including the leading accounting firm EY.

Late last month EY, the longstanding Wirecard auditor, said there were: “Clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception.”

In simple terms, the people behind Wirecard appear to have successfully pulled the wool over the eyes of experts by claiming to have a fintech product that would take the commercial world by storm.

Flip the model

Australian investors are also experiencing a bit of the fintech miracle through the remarkable success of a number of buy-now, pay-later (BNPL) companies, which appear to be reinventing the business of consumer finance.

Perhaps the BNPL brigade has found a slicker way for business to sell stuff and for consumers to acquire things, but the reality is actually a lot simpler than that because all that’s happening is the relaunch of a debt-management system called ‘factoring’.

Invented centuries ago, the factoring process involves a financier buying a company’s debts at a discount and then collecting the money owned as quickly as possible, and with the fewest bad debts possible.

Take that tried and proven (but not very pleasant) process and layer a computer program over the top and you have BNPL, which flips a business-to-business model into a business-to-consumer model.

Customers get the goods they want today by agreeing to pay a series of future instalments; the shopkeeper gets quicker and more sales (hopefully); and the financier collects the future payments. Who could possibly lose?

The answer to that question is everyone, especially at a time of recession when people without jobs, or soon to lose them, sign up for a serve of BNPL only to find they can’t pay, eventually resorting to some form of bankruptcy, handing a damaging wave of bad debts to the factoring company, which then has to explain to its investors what went wrong.

There’s not much new in business and BNPL is certainly an example of the wheel turning full circle – all the way back to the 19th century.

All that glitters …

Gold, as heavy as it might be in its elemental form, is also a balloon in the making, at least at the small end of the market where tiny exploration companies are rapidly reinventing themselves while hoping some of the gloss from a near-record gold price rubs off.

Unfortunately, while the top end of the gold sector will profit handsomely from the current gold boom, and some explorers will succeed spectacularly, the vast majority of the late arrivals will become expensive proof for investors of the aphorism about gold and things that glitter.


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