Why China won’t save Australia from an ‘Economic Winter’

Thursday, 19 July 2018
Melbourne, Australia
By Bernd Struben

  • When the next crisis strikes…
  • Zero Hour
  • Trump’s History Making Summit with Putin Just the First Step

When the bottom dropped out of global financial markets in 2008, Australia was largely spared.

Though you might take exception to that statement if you were heavily invested in the stock market.

In a single day, on 10 October 2008, the ASX 200 plummeted 8.3%. During the course of that week, the index fell 16%. You may well remember the sense of panic as sell orders piled up and buyers were few and far between.

This is a good reminder on the limitations of stop losses. Having an exit plan is important. But when markets well and truly tumble, share prices could easily fall past your stop-loss levels before you find any takers.

By the time the smoke cleared, the ASX All Ordinaries (which contains 500 of the largest Aussie listed companies) had lost 54% over 16 months.

While both the ASX 200 and the All Ordinaries are currently near 10-year highs, they have yet to surpass their November 2007 peaks. Yep. Almost 11 years later and anyone who bought at the peak is still underwater.

Yet it could have been a lot worse.

More, after the markets.


Overnight the Dow Jones Industrial Average closed up 79.40 points, or 0.32%.

The S&P 500 gained 6.07 points, or 0.22%.

In Europe, the Euro Stoxx 50 index finished up 27.58 points, or 0.80%. Meanwhile, the FTSE 100 rose 0.65%, and Germany’s DAX gained 104.40 points, or 0.82%.

In Asian markets, Japan’s Nikkei 225 is down 17.51 points, or 0.08%. China’s CSI 300 is down 0.19%.

In Australia, the S&P/ASX 200 is up 27.49 points, or 0.44%.

On the commodities markets, West Texas Intermediate crude oil is US$68.88 per barrel. Brent crude is US$72.82 per barrel.

Turning to gold, the yellow metal is trading for US$1,224.63 (AU$1,649.56) per troy ounce. Silver is US$15.50 (AU$20.88) per troy ounce.

One bitcoin is worth US$7,323.52.

The Aussie dollar is worth 74.24 US cents.

When the next crisis strikes…

Now, back to 2008.

As the US and most European and Asian nations dropped into recessions, Australia’s economy kept ticking along. And though unemployment notched up, it didn’t rocket higher. The unemployment rate went from around 4% in early 2008 to roughly 5.8% in 2009, before tracking back down.

It would be nice to credit Australia’s industrious workers and sound businesses. But the primary reason Australia didn’t get sucked into an ugly recession was China.

At the time, China was in full expansion mode. Chinese industry couldn’t get enough of Aussie resources. This drove the mining boom, creating high-paying jobs and keeping the money flowing.

Unfortunately, when the next crisis strikes — and this is a ‘when’ not an ‘if’ — Australia won’t be able to count on the Middle Kingdom to keep us afloat. In fact, during the next crisis years, China may be the one pulling Australia down.

This headline comes from Bloomberg, ‘Panic Roils China’s Peer-to-Peer Lenders’. The article continues:

China’s savers are rushing to pull money from peer-to-peer lending platforms, accelerating a contraction of the $195 billion industry and testing the government’s ability to maintain calm as it cracks down on risky shadow-banking activities.

In some cases, savers are turning up at the offices of P2P operators to demand repayment, spooked by reports of defaults, sudden closures and frozen funds…

China’s P2P industry, the world’s largest, is one of the riskiest and least-regulated slices of the nation’s sprawling shadow-banking system…

While there’s little sign that the P2P turmoil has spread to systemically important wealth-management products issued by banks, much of China’s $10 trillion shadow-lending system faces the same headwinds of rising defaults, slowing economic growth and official calls to end to implicit guarantees on risky investments.

The chart below shows you the number of peer-to-peer lenders that have failed over the past five years:

chart image

Source: Bloomberg
Click to enlarge

Alarmingly, just halfway through the year (the data is as of June 2018) the number of failed lending platforms already exceeds the record number set in 2017. And with Chinese savers feeling spooked, the remainder of 2018 could prove bleak for China’s US$10 trillion shadow-lending system.

If you need more convincing that China won’t be doing the heavy lifting to help Australia through the next crisis, then consider Wintime Energy Co.

The Chinese coal miner just defaulted on AU$14.4 billion dollars in debts. That’s the largest corporate default in China so far this year…though that record may not hold.

Also from Bloomberg:

China this month recorded one of its biggest corporate-debt defaults yet, with the downfall of a coal miner that had ridden the country’s wave of credit until policy makers changed the game with their deleveraging campaign.

For investors in Wintime Energy Co., it’s been far from a winning time now that the company from northern Shanxi province is proving incapable of rolling over debt that quadrupled in less than five years. How the borrower ran up a 72.2 billion yuan ($10.8 billion) tab that it now can’t make good on illustrates why this year will be China’s worst yet for corporate defaults…

“China’s economic growth was largely driven by debt and its corporate debt looks like a Ponzi scheme,” said Qin Han, chief fixed income analyst at Guotai Junan Securities Co. “More firms may give up on repaying debt if they encounter financing difficulties.”

It’s no secret that the rapid growth behind China’s miracle economy was fuelled by debt.

That’s the same fuel Australia has used to maintain its world record of 27 recession free years, if you believe the official statistics.

But at some point those mountains of debt need to be repaid…or defaulted on. And if the recent surge in defaults in China is any indication, there could be a lot of lenders left holding worthless scrips.

Zero Hour

US economist and forecaster Harry S Dent believes the fallout from the GFC in Australia was nothing compared to what lies ahead within the next two years. Not only does he expect the stock market to implode, he predicts an Australian housing price crash of 50% or more.

He explains everything in his new best-selling book Zero Hour, including a detailed timeline of the events that will lead up to what he calls ‘Economic Winter’.

It’s a compelling read. And it could make the difference between sitting on the sidelines and watching your wealth disappear, or proactively taking steps to secure that wealth…or even watch it grow.

If you haven’t already, you can get your discounted copy of Zero Hour here.

Finally, here’s the latest on Trump’s unconventional push for world peace from The Australian Tribune:

‘Trump’s History Making Summit with Putin Just the First Step’

US President Donald Trump’s unorthodox approach of extending a friendly hand to Russian President Vladimir Putin was as courageous at it was cunning.

Despite widespread condemnation from his opponents on the left — along with some military hawks on the right — Trump took a long overdue step towards normalising relations between the world’s two largest nuclear powers.

Surely a world in which…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another, then The Australian Tribune is for you.

And it’s absolutely free.

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