investment slowdown. Those at risk are the countries and regions that have supplied China with the commodities necessary to build empty cities. While the (comparatively, in terms of GDP) enormous Chinese stimulus package from the first part of the financial meltdown in 2008 has generated incredible growth in GDP and asset prices, the game appears to be over for flipping 1000 square foot apartments in Shanghai. After the direct hit taken to China, the picture looks very grim for Australia, where a bursting Chinese housing bubble could drive industrial commodities lower, sparking higher unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble. In the near to medium term, Australia is showing some major red flags.
The Australian Department of Foreign Affairs and Trade reported an increase in Chinese exports of 31.2% from 2008 to 2009 in its latest summary on Australian trade, and more than 20% of total exports. Within the top 25 national exports, iron ore, copper, and aluminum are the main industrial metals that make up a part of Australia’s commodity export based economy. Of all these metals, China is the largest export destination for each one, particularly in the iron ore trade necessary for real estate development. The growth in export production has caused Australia to run a trade surplus with China for the first time in the past five years. As Chinese financial markets begin to slump along with industrial commodity prices, Australia should be the next domino to fall. The Australian Bureau of Agricultural and Resource Economics (ABARE) has forecasted continued growth in commodity exports. However, considering the dependence on China as shown in the following graphs, any sort of slowdown in Chinese demand will prevent export led growth.
All of the data above is from the 2008 to 2009 fiscal year. While relatively useless in a vacuum, the data from 2007 to 2008 indicated incredible growth in Chinese copper and scrap/waste consumption. It is reasonable to attribute the growth in industrial commodity consumption to measures taken by the Chinese government and central bank to stimulate economic growth and investment. These measures have created a large Chinese bubble that Australia will be unable to insulate itself from unless it uses trade protection measures, inevitably destroying all “growth” made since the financial market led expansion began in March of 2009. Don’t believe the hype about Australia avoiding the economic crisis of two years ago. Instead, they were fortunate enough to see a major trade partner engage in an enormous attempt to spur investment and export production, and now that the Chinese are on the verge of private investment destruction, expect the Australian economy to get flushed down the toilet as well.
Of course, with the US in full print mode, spraying more ink on pulp than a 4 year old HP inkjet (those things never lasted more than 3 years for me), we have just the solution for export economies going down the crapper (pan right).
Please consider the following articles:
- Chinese Copper Imports Drop for First Time in Three Months: Bloomberg
- Iron Ore Prices Slump on China Housing Concerns: Bloomberg
- Australia Plans 40% Mining Profit Tax: Bloomberg
I recommend all paying subscribers download the full document (Australia Macro Outlook (611.47 kB 2010-05-27 04:43:48) to explore the direct linkages between nationalism, taxes, China, employment, housing bubbles, and what they mean for Australia and macro investment oppurtunities. We will probably be following up with specific company forensic analysis.
BoomBustBlog China-related links
- A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis
- What Are the Odds That China Will Follow 1920's US and 1980's Japan?
- Signs of a China Credit and Real Asset Bubble Are Now Unmistakable!
Subscribers should reference the following related topics/documents:
Additional and relevant commentary on the bubble in China:
- It Doesn't Take a Genius to Figure Out How This Will End
- Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let's Look at the Facts
- HSBC is Performing as Expected
- Part 2 of the Mechel Overview is Available
- Some Light Shown on My Developing China Thesis
- Follow Up to the China Short Thesis Debate
- China's Most Expensive Export: Price Inflation
- Believe Those China Growth Stories at Your Own Risk - Just Ask Google!
- He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest Spittle and Saliva Spray Upon Ye Face
- Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!
- All of my warnings about China are starting to look rather prescient
- Now that the world is forced to agree with Reggie on China's growth propsects...