Forum Topics China - Lehmann moment?
a month ago

This article was really quite interesting for me. The size and dependence of real estate as a proportion (third) of China's economy was well known but the level of debt coming unstuck, structural and demographic headwinds, simultaneous market inefficiency and youth unemployment and the potential for driving an Australian recession and collapse in the balance of payments is a real worry.

Geopolitically - I think this just brings into focus for me how profoundly stupid AUKUS is. The risks to me are more immediate - no better way to put lots of young people to work immediately than make bullets and have the rest of the youth fire them. A nuclear sub in 30 years when China may not even have the logistic and economic fortitude to have a prolonged conflict seems dumb. At least the HIMARS deal makes sense. You just have to make it clear that the cost of warfare is too high to deter. Military power projection for a small country like us is stupid. Diplomatic offensive, militarily defence and alliances is always Australia's play.

In the short term..

  1. what stocks benefit from a weak Yuan.?
  2. And where does one hide if the Chinese economy gets worse (after all our prosperity seems dependent on digging holes for them)?


a week ago

On the topic of Chinese property, I have just finished listening to this Economist podcast. While its not predicting a "Lehmann's moment" this was the latest SM Forum of a relevant theme so I thought I'd add it here.

Money Talks: China's Property Crisis (this the link to Apple store, but it is available elsewhere too).

The group at the Economist often do well-researched and thoughtful pieces of research. Rather than a "Lehmann moment" I'd characterise the analysis as more of a slow train wreck that has been unfolding for decades, with COVID-zero (without consumer stimulus), giving things a bit of a nudge. (While many prophets of doom have sounded alarm over the years - just because it hasn't happended yet, doesn't mean they are wrong.)

The podcast argues that, this time, there are some barriers to China resuming growth:

1) Large number of units pre-paid and yet to be delivered - undermining confidence, with potential for unrest if a significant portion aren't delivered;

2) In-debted local governments without the same opportunity to re-zone land and reclassify people from rural to urban to attract central funding;

3) Deflation of the yuan, which will export deflation to the rest of the world (good for RoW) but will make things tougher for the Chinese consumer;

4) Population now in decline, a drag on any growth; and

5) Unfavourable foreign investment climate, as RoW diversifies supply chains with US-led "friendshoring" and blocking of advanced tech an added head wind.

In summary, the economy is now so big, the podcast argues that it is hard to see where the growth will come from.

When asked who the likely victims are: Australia and Brazil - countries dependent on mining - are top of mind, as well as property bond-holders, and the retail public property investors.

The Chinese banks are considered generally strong enough to withstand a property collapse, and of course the government will be alert to any instability there.

They also argue that a further risk factor is the increased centralisation of power into the CCP that has occurred under Xi, which is less well-placed to untangle the situation, so presents the opportunity for further mis-steps.

Interesting to see how this plays out. I am sufficiently concerned about the downside risk, that I am currently completely out of resources in my RL ASX-portfolio.

I'm definitely not making any preductions here. In fact, just the other day I read an article from the same magazine outlining the challenges of supplying the global energy transition, which is very bullish for Cu, Li and others. Certainly, a serious downturn in mining over the next year or so, might provide an entry opportunity for the long-term energy transition metal thematic.


a week ago

Thanks Mike

im a regular subscriber to the Economist and listen to all of their podcasts whilst walking my hyperactive collie-kelpie cross for hours every day!

I would highly recommend this, and most of their other podcasts. They are free currently but will be a subscription service for $25/year at the end of the month.

Im fascinated by China. I lived in Beijing for 4 years and loved my time there.

I think Western analysts previously got a lot wrong about how it ticks but have recently been considerably more accurate. The big unknown with predictions is what The Party will do as policy responses to this problem.

The over-arching priorities are firstly the survival of the Communist Party and secondly social stability. These are almost the same thing. But violent suppression of protest is always on the cards to ensure priority 1 over priority 2!

I would agree that they are in a bit of a bind with this set of issues. Huge infrastructure spending is their conventional solution but this is less and less attractive as the return on investment is now negative (dollar for dollar) as all the bridges, high speed rail networks and motorways have already been built.

The worst scenario is the manufacturing of an external crisis, which would solidify popular opinion behind the Party and solve youth unemployment in a single stroke - drafting all those excess young males in to the armed forces.

Hopefully, this won’t happen.

Xi Jinping seems very keen on re-establishing a more socialist state and bringing the very rich into line.

it’s difficult to see how this can be done whilst maintaining an efficient use of capital.

it will be intriguing to see how this pans out.

I have also exited the majority of resource stocks (other than gold producers) and am mulling how to position myself for a significant China slow down. Most options other than fixed rate bond portfolios seem to have at least a few flaws!

id love to hear how others are thinking about this.



a week ago

I'll definitely take a listen to that podcast @mikebrisy. And I think you nail the key insights re the Party @Chagsy

I do find it hard not to be at least a little bearish on China, while acknowledging that things can unfold slowly and over many years. And the can can usually be kicked further down the road for a time.

The connection with Aussie miners is well made, I think. But if there is any pain there none of us are immune; more than a third of our exports go to China, and it's by far the biggest source of trade income:


If capital controls are ramped up (or, at least, better enforced), which I think is likely, that's not going to be great for our property sector either. Let's not forget the significance of tourism and education to our economy either, and China plays an outsized role here too.

I do think people can be too simplistic when they suggest China is different because the State will just "do what it takes". But to me this just shows a fundamental misunderstanding of economics. Yes, for a time (even a long time) central authorities can 'bail out' troubled areas. But this is either done through tax/redistribution (which has impacts elsewhere -- it's not a free lunch) or by debt (which just shifts the problem to the future, and you can only go do far before carrying costs impact there here and now, as the US government is fast discovering) or by money printing (which just steals purchasing power from savers -- and typically the working class who can't as easily preserve capital in scarce assets).

Someone has to pay the piper eventually. No central actor can simply fix things by creating more IOUs or more tokens, or just manually redirecting resources. Economies are complex, dynamic and adaptive. You cant hope to control or predict them with any degree of accuracy or certainty, any more than you can hope to influence or predict the weather over any reasonably timeframe.

Malinvestment bears a cost, eventually, to investors. Or to those who are forced to bail them out.

The next decade or two should be interesting.