Investment Advice

A good pal of mine works in Asia for a global investment bank.

He was over in China on a fact-finding mission recently – talking to miners, commodity traders and buyers. I called him up to see what he could tell me. He said, ‘The news from China wasn’t great… Most people are neutral to slightly bearish within China.’

With good reason – there have been some ominous creaks and groans coming out of the good ship China recently.

We know that China’s economy grew at 8.1% in the first three months of the year – that’s if you believe the numbers – but what about right now?

 

There a few things we can look at here and now, so we don’t have to wait months to find out today’s economic growth figure.

Things like electricity production growth, bank lending, and real estate figures for starters.

And they don’t look good.

This is probably a big reason the Aussie dollar and resources sector have taken a big hit recently. The Aussie Dollar has fallen 7% in just a few weeks.

 

 

 

The Clue From Chinese Power Production

 

Chinese electricity production may seem like an obscure thing to look at, but if you want to get an up-to-date snapshot of how much economic activity is taking place in a country, just look at the level of electricity the country is producing to meet the economy’s needs.

Every part of an economy needs power: homes, offices, factories, building sites, trains, airports, and of course government. So if an economy is growing, it needs to produce more power.

For the last 6 months, Chinese power production has grown between 7 and 12% (year on year).

But power production has abruptly stopped growing in China. The power produced in April was just 0.3% greater than a year earlier.

 

 

 

This is a worrying sign that the Chinese economy may have just ‘dropped anchor’.

But it’s not just power production.

Chinese Bank Lending Has Fallen Off a Cliff Too

 

The China Daily newspaper ran an article on Friday reporting that, ‘China’s big four banks made almost no new loans in the first half of May.’

China’s big four are Industrial and Commercial Bank of China [HKG: 1398], China Construction Bank [HKG: 0939], Bank of China [HKG: 3988], and Agricultural Bank of China [HKG: 1288].

Chinese lenders were already slowing down their lending. In April it fell to 681 billion, from 1001 billion yuan in March.

But still – zero new lending from ‘China’s big four’ in the first half of May comes as a shock

Last weekend’s Chinese financial data fits the same picture. These showed China’s imports grew at just 0.3% in April.

China’s Real Estate is Also Hitting the Skids

 

Residential construction growth in China has fallen from 16% to 4% in a year.

And it’s not selling either: sales are down 17.5%, and there is now 47.4% more residential floor space for sale than a year ago. Land sales are down 55% compared to last year.

This is hitting China’s growth rate hard as real estate investment makes up 13% of the GDP figure.

The evidence is mounting before your eyes that China’s economy is stalling.

Commodity markets are seeing the effect of this already. The Financial Times reports that,

 

‘”We have some clients in China asking us this week to defer volumes,” said a senior executive with a global commodities trading house, who warned that consumers were cautious. “China is hand to mouth at the moment”… A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.’

 

China’s Slowing Economy – What to Make of It All?

 

If I’m reading these signs right then China’s economy is having a heart attack.

Commodity prices and resource stocks have taken a pasting recently, but could it get worse yet?

As China is Australia’s biggest customer, a China slowdown would be terrible news for the Australian economy.

So I asked my investment banking pal over in Asia what the view looked like from where he’s sitting.

He reckons that it’s hard to be outright bearish about China as they always seem to find a way…if prices fall far enough they could step in with intervention again.

I’ve often read that the Chinese political model values stability above almost everything else. They foster social cohesion by keeping growth super-sonic. So if China’s economic growth is stalling, they may do something drastic to avoid the social instability they fear.

China has just dropped its reserve rate requirement (RRR) from 20.5% to 20%. This means banks can lend more to encourage the whole merry-go-round to keep going.

But it’s going to take many more lollies than that from China’s monetary policy makers to stop the crash from the last sugar hit.

Dr. Alex Cowie
Editor, Diggers & Drillers

via moneymorning.com.au

The rate cuts in November and then December were supposed to save Australian house prices.

Yet less than six months later, recent economic data suggest things are getting worse.

According to RP Data, capital city house prices lost a combined 4.5% last year.

 
But ever the optimist, RP Data called this decline in April a ‘renewed softness’.

Even Tim Lawless, RP Data’s research director, admitted interest rate cuts won’t help the housing market. He said:

 

‘Our estimate of transaction volumes to February suggest that the two interest rate cuts in November and December last year are yet to provide a sustained stimulus to the market, with transaction volumes remaining reasonably steady around 31,000 each month. Comparing this with the sales rate through mid 2009 when around 45,000 homes were selling each month, the slowdown in buyer activity becomes quite clear.’

 

Housing sales by volume are down 31% since mid-2009. Adding to the housing woes is the amount of ‘housing stock’ available. It’s double that of five years ago.

 
And not only are more houses available, but they’re cheaper as well.

Increased housing stock is dragging down house prices. Yet, what will happen to house prices when high debt levels catch up with us?

Take a look the two charts below. In the first chart, the blue line shows you Australia’s private debt to disposable income. It stands at 150%. In comparison, at the peak, Americans had a private debt level of 300%.

The peak in American private debt levels occurred just as house prices began to fall.

The next chart gives you an idea of just how big the housing crash was in the US (blue line)…and a warning of what Aussie home owners can expect:

 
Those charts come from Professor Steve Keen. He’s an economist who predicts a US style housing crash in Australia. He’s convinced that high personal debt levels will bring on a crash in Aussie home values, much like what happened in the US.

Professor Keen’s thinking used to be at the fringe of economic thought. Today, it’s mainstream.

The International Monetary Fund (IMF) has confirmed the correlation of debt levels and house prices. In their World Economic and Financial Surveys publication, the IMF said:

 

‘Based on an analysis of advanced economies over the past three decades, we find that housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted.’

 

The thing is, even if we don’t see a US style housing crash, monthly housing data suggests home values are falling at a steady rate.

So rather than a quick housing bust, Aussie homeowners face a long-term housing bust.

And it’s already underway. Even so, some spruikers still won’t admit it. They won’t say prices have fallen, they’ll tell you prices are soft…weakening…easing…. Or any other word they can think of to avoid saying, ‘Aussie house prices are falling‘.

The good news is the spruikers can’t hide behind industry-speak for much longer. Each month, fresh numbers show a dismal housing market.

One in permanent decline.

How long will it last? We don’t know that for sure. But this sort of decline could drag on for years. The US is into its sixth year of falling house prices.

The housing bubble took two decades to build up…it might take another two decades before house prices go up again.

Shae Smith
Editor, Money Weekend

via moneymorning.com.au