Why China’s Hidden Debt is Bad News for Aussie Stocks

“It’s our long corruption, short property play.” – Jim Chanos, founder Kynikos Associates

Jim Chanos is one of the big guns in investing. He’s up there with Warren Buffett, Jim Rogers, George Soros and Jeremy Grantham.

Chanos is “short” China. In other words, he’s banking on analysis that says China is overvalued and due for a fall… We agree.

But to be short China actually means being short something else. You can probably guess what we’re talking about. Here’s a clue. Again, from Jim Chanos:

“We’re short Chinese banks, the property developers, commodity companies that sell into China. Anything related to property there is still a short.”

That’s right, it means being short Australia. Something the rest of the world is starting to figure out. The only ones yet to get the picture are Aussie mainstream investors and the mainstream press.

But more on that in a moment. First…

Operation Disappointing the Market

We couldn’t let today pass without mentioning the two-day Federal Open Market Committee (FOMC) meeting. The key part of the Fed announcement reads:

“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.”

Just as the market expected, the Fed will implement Operation Twist… buying longer-term government bonds and selling shorter-term government bonds. The aim is to flatten the yield curve. That means forcing long-term interest rates lower.

The theory is it will make businesses more likely to invest in capital goods and make individuals more likely to buy a home. That’s because in both require long-term loans.

We’ll be honest, we expected the Fed to do more. Why? Because they’re mad. And mad people do mad things. In this case, perhaps they aren’t as mad as we thought… or the Fed is playing a game… trying to prove to the three FOMC members who disagree with Dr. Bernanke’s view that the Fed must do more.

The fact is, the U.S. economy is headed for another recession and depression. This will happen whether or not the Fed meddles. It’s just a case of whether it’s now and inflicts a lot of pain… or whether it’s in a few months… and inflicts more pain.

And make no mistake, what’s bad for the U.S. is bad for China. And what’s bad for China is bad for Australia.

That’s despite what you’ll hear from mainstream commentators…

No haven, only risk

…Such as our old pal, Michael Pascoe at the Age. Earlier this week he wrote:

“While Europe and Washington fiddle around fires of varying intensity, foreign central banks buying increasing amounts of commonwealth bonds are sending a message: Australia is a safe haven.”

Yeah sure. Does anyone really think the financial advice of central bankers is advice worth following?

These are the guys who sold gold before it tripled in price. The Reserve Bank of Australia sold two-thirds of its gold in 1997. (By the way, Peter Costello was Treasurer then, so for all those folks who think Costello should get the Euromoney finance minister award rather than Wayne Swan… think again!)

And as for the bright central bankers who bought Aussie government bonds for safety, well, they’ve seen the value drop 10% in recent weeks. As the “safe” Aussie dollar has sunk from USD$1.10 to USD$1.00 today.

We’ve mentioned before that it’s foolish to believe any investor sees Australia as a haven. Australia is a risky investment. Foreign investors invest in Australia as a way to invest in China.

If you believe the China resources boom will last 50 years, then why not buy into the country that’s helping support the boom – Australia. But as soon as the boom stops, Australia’s haven status will be forgotten in a flash.

Because the China boom may not be as secure as many think. Jim Chanos makes the point that while China’s government debt is low, other debt isn’t…

China’s debt bubble set to burst

In fact, according to 2008 numbers compiled by Global Finance, China’s total debt to GDP was 159%. That includes government, non-financial business, households and financial institutions.

One of the biggest beneficiaries of that debt is Australia.

What we’re saying is, don’t fall for the idea that China has bought and paid for Aussie resources. Because there’s one bit missing… it has borrowed, bought and paid for Aussie resources.

It used those resources to build tall buildings, shiny new roads, sports stadiums, and of course, consumer goods. But one day the spending will slow down and possibly stop.

Because even if China’s growth continues… even if China one day passes the U.S. as the world’s largest economy… it won’t happen in a straight line… with no bumps or recession along the way.

You can see from the chart below, the U.S. economy has had 17 recessions (shaded areas) in the past 90 years:

Real Gross Domestic Product (GDPCA)


That was despite it being the biggest economy and biggest consumer of resources. Importantly, the recessions in the U.S. were felt in one way or another around the world… including in Australia.

Put simply, of its top 10 trade partners in 2010, one-third of China’s trade involved the U.S. and Germany… add in Japan’s basket-case economy and you’re looking at one-half of China’s trade.

Like it or not, a recession in the Western world (U.S. and Europe) will impact China.

And so, at some point, China’s economy will slow. That spells trouble for Australia because foreign investors buy Aussie assets for one reason: China.

Let’s get is straight: Australia isn’t a haven for foreign investors. And the Aussie dollar isn’t a reserve currency.

So when we’re told a U.S. or European recession won’t affect China… and therefore won’t affect Australia. We don’t believe a word of it and neither should you.


Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

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26 Comments on "Why China’s Hidden Debt is Bad News for Aussie Stocks"

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You are probably correct Kris and with Chano’s going short, something may be a foot. Demographically the time for China to peak is 2020 (baby boomers hit an age where they save & do not spend as much), so we may have another decade of Aussie boooooming – I hope so! China also has over 50 million young men who will not find a wife in China, because of the one child policy……they might come here to Oz and build all our new cities & infrastructure for the ‘continuing’ mining boom!


Will these 50,000,000 Chinese males get ‘Southern Cross Tattoos’?
I can smell a business opportunity…also think of all the cargo shorts we can sell them!
There is money to be made.

james holt

tattoos are for losers. as for those cargos u wanna sell them they are probs made in china any way. may be you should get of ur ass an find your self a job, get some more cargos an a another southern cross tattoo in your face….

Peter Fraser

Wow – the Dow is down over 500 points, the Aussie $ is below 0.97 USD, Gold is more than 12% off its highs, and Silver is down a massive 10% overnight, Oil is dropping below $80.

Impressive falls.

Glad I have cash and real estate.


pf@4. Real estate’s time is coming. As sure as night follows day. Remember that this is where the whole “thing” we’re witnessing started.


No doubt that’s what the headlines in the papers will be screaming: safe as houses. But in your typically singular outlook, you forget that house price booms and bubbles are part of the reason why the world is in this particular situation. But today will be one of wrong-headed smugness around the water cooler with uncle Pete leading the sermon of collective calm and misinformation.


Is gold a safe haven?
Too early to say, however should gold be at $2000 ounce by now with all the fear of hyperinflation and the FED?
We maybe heading for a minsky moment where everything falls except cash!
That includes Real Estate PF.
Go Jim Chanos!

Peter Fraser
JC – I very much doubt that any media will scream that headline. But I do live in and enjoy the comfort of a home, and that value to me remains constant regardless of whether the nominal value rises or falls. Perhaps you don’t understand that, or perhaps you do, who knows. I was more pleased that I got out of shares some time ago (post recovery) and converted to cash until I can see some stability in the market. I’m not sure how you get misinformation out of that. Did cash and real estate in Australia fall markedly overnight… Read more »
Peter Fraser

TRB – Yes I agree real estate can and probably will fall, but what does that matter if you need a house for your family.

Gold is a safe haven – that is why it rose so much when confidence fell in the market – Oh – wait a minute – gold and silver tanked. Wow what spectacular falls – looks like my new watch has lost a few dollars in gold value.


PF@8, The idea that owning a home or pumping all your wealth into real estate puts you in a relatively better position is just smug nonsense as well as showing a naive understanding of why the world is in the situation we’re in. Of course, in a previous month, you’d be ranting on how house prices are justified because of the Australian “safe haven” status. It’s misinformation at its finest and just side-tracks the real issues. Furthermore, the suckers who have bought property believing in its superiority as an investment class might not be feeling as smug as you (and… Read more »