Andy Xie: Australia is Facing a Hard Landing

Australia is facing a hard landing, predicted by Dr Andy Xie, renowned Chinese economist.

Below is extract from his recent article:

A decade ago, some Australian investors came to my office for advice on how to invest in China. I told them to go home and buy shares of Australian companies in the mining industry. Bellwether stocks like BHP have appreciated ten times since. The story began with China joining the WTO. This change would increase China’s share of global trade. As China’s expenditure is heavily weighed towards fixed-asset investment, this redistribution of income would increase the demand for mineral resources. Hence, I believed that the industry would have good times ahead.

As the prices of minerals like iron ore surged, the super profitability attracted all sorts of people into prospecting all over the world. Numerous investors went into African jungles and Mongolian grassland to strike it rich. Even though risks for investing there very high, like getting one’s head chopped off by upset locals, the fantastic margins pumped up these people’s courage. Unfortunately, if and when these assets become productive, the margins are gone. Most stories about chasing riches in faraway lands end like this. Some smart people have sold undeveloped assets to others through IPOs in Hong Kong. Those who haven’t sold are stuck. 

The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too. Among the mining investors I have met there is strong hope that China would soon introduce a stimulus like in 2008. This is why the price of iron ore has rebounded by 40 percent recently. Bottom fishers came in to speculate on China’s possible stimulus before or soon after the 18th Party Congress. They are likely to be disappointed. The last stimulus has made the overinvestment situation so severe that another round is just plain wrong. Also, it would trigger severe inflation and currency devaluation. I just don’t see it happening.

The trigger will likely be a series of mining projects failing to obtain financing in the international capital market. Their investors will have to walk away from their investments. The reduced capital inflow makes the current account deficit more difficult to finance. Of course, a lower iron ore price increases the deficit too. The combination will cause the currency to establish a declining trend. The trend will send other financial capital to flee.
 
Judging the timing of a bubble bursting is always an art. My gut feeling is that it happens in 2013. The global economy is sinking. This big picture makes the financing market jittery. When China’s stimulus fails to materialize in six months, many mining investors would walk.

On the way up a bubble has many ways to snowball. The same is true on the way down. When a currency is appreciating, there is strong demand for property. The strong property market powers credit-financed consumption. Australia has a highly developed capital market like in the United States. The multiplier effect is powerful on the way up. Debt has piled up in every corner of the economy, and creative accounting is employed to pump up banks’ balance sheets. One consequence is that Australia has the highest net foreign debt among all developed economies.

Want more insights from Andy?  Contact us today to engage him to share his views at your next conference.