Australia’s Great Hope, China’s Bursting Credit Bubble

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‘Buy the rumour, sell the fact’ is a well-worn market phrase. It refers to investors who buy a stock in anticipation of a change to policy, an announcement, or some other market moving development. Usually, the rumour encourages excessive speculation, and then when it morphs into fact, selling begins as the reality is not quite as exciting as the rumour promised. 

Right now, you’re seeing a lot of buying on rumours of Chinese government or central bank stimulus. Where did these rumours come from? Is it merely hopeful market chatter, or is it from a connection to an official source? There was an announcement approving more railways, but whether this came from an existing project pipeline we’re not sure. 

So we don’t know how solid the rumour mill is. All we do know is that such rumours began to surface on Monday, after data showed activity in China’s manufacturing sector sunk to an 8-month low. We can understand where the expectation comes from. In late 2012, when the first cracks in China’s credit bubble began to appear, the authorities freaked out and got the bubble back on track.

At the time, the iron ore price had plunged below US$90/ tonne as the slowdown took hold.

But things went a lot further than they expected. Instead of just getting growth back on track, the credit bubble entered into the crack-up phase. The shadow banking system exploded, providing additional finance to sectors that didn’t need it. And it was the household sector that largely provided the finance, forced out of low interest bank accounts by financial repression, putting billions of yuan worth of savings at risk.

The result was a climactic end to the largest credit expansion in modern economics. Although to be fair, the majority of pundits don’t see recent events as the beginning of the end of the Chinese credit bubble at all. Driving with their eyes on the rear view mirror, they see a benign outcome through the omnipotence of China’s central planners.

After all, they’ve managed the situation just fine so far. Which is why the market is now expecting ‘stimulus’. Y’know, just to right the ship after a little lurch to the port side.

But how confident can you be in a bunch of bureaucrats who just inflated the biggest credit bubble in modern history? We predict tears, and lots of them. We also predict that no one will care for our predictions. We’ve been banging on about China for so long now that we’re like a broken record…or the little boy who cried wolf.

A necessary precondition of a bubble is for the naysayers to be thoroughly discredited in the eyes of the market. That’s pretty much happening now. China will sort it out…always have, always will. Don’t worry, just buy iron ore.

Meanwhile, over in China, the general populace doesn’t seem so confident…

(Reuters) – Hundreds of people rushed to withdraw money from a branch of a small Chinese bank on Monday after rumors spread about its solvency, local media reported, reflecting growing anxiety among investors as regulators signal greater tolerance for credit defaults.

Granted, it’s only a small bank, but this is how these things start. We’ll repeat what we’ve been saying for a while. China’s credit bubble bust is in the early stages. You can close your eyes and block your ears if you want, but history tells you the aftermath of credit bubbles isn’t pretty.

As for those buying rumours, all we can say is, watch out for the fact. And when a nation’s currency, stock market and economy sweat on the stimulus plans of another nation, maybe we’re not in such a strong situation after all. 

Regards,

Greg Canavan+
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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2 Comments on "Australia’s Great Hope, China’s Bursting Credit Bubble"

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ZX80
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Please fasten seatbelts!

Jason
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Wait until they read up on Chinese demographics. Now there is the definition of the word DECLINE.

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