China’s Worst Case


Before we get stuck into today’s market action—and boy is there a lot of it—we did manage to put together an edited version of our Skype call with Chris Mayer, who was in the Grand Hyatt in Beijing at the time. We say “we” but it was really our video editor Ben who managed to deal with the buffering and time lapses. You find part one here and part two here.

As you’ll see, the Chinese picture is a lot more complex from up close than it is from far away. We talked about the economy, private equity, where Chinese stocks are listed, and the contrast between industries that are state-backed and those that are not. The call could have lasted a lot longer.

Left out of the final cut was this comment from Chris, “The worst case scenario for the global economy is a full bore China collapse because there are very few answers for that.” There are one or two answers, though, as you can see from the chart below. It shows the performance of the two investments we recommended in our “Exit the Dragon” report vs. the All Ordinaries since April 30th.

Exit the Dragon Portfolio

Thumbing through the report this morning we read this line, with emphasis added:

The risk is that should the Chinese economy come to a grinding halt, one of the first currencies that global investors will abandon is Australia. With such a reliance on selling our raw materials overseas, there’s little else that Australia produces – apart from houses – that will be of interest to international investors. The rush for the exit will be swift, and potentially painful. So, if that did happen, what can you do to protect yourself?

The big down move in the Aussie dollar in the last few days has confirmed that analysis, as has the big up-move in the first recommendation on the chart above. But Bloomberg reports earlier today that the Aussie, along with the Euro, is up on speculation that policy makers will interview to stop the big slides.

They can have a crack. But if hot global investment capital flows flee risk markets and head toward what they perceive as safety, the moves in currencies could be even bigger than you expect. And we have reason to believe, as we’ll explain later to Australian Wealth Gameplan readers in the weekly e-mail update, that the second investment recommendation could profit from a region that’s managed to stay out of the limelight so far…Japan.

But what about the broader markets? They are selling off with conviction after a brief short-covering rally. Ironically, when you restrict short selling you remove the very mechanism with which corrections are generally reversed: a short-covering rally. When shorts cover it creates the buying that’s necessary to stop stocks from falling. You also get value investors wading it at lower levels.

Yet policy makers—in an attempt to stop the selling—have no given traders every reason to keep selling: nobody knows what the policy is going to be tomorrow! To be fair, nobody knows anything about anything when it comes to tomorrow, except that it will probably come.

If it does, it will be Saturday, which means we’d better get cracking on our update to paid subscribers. But not before noting Ross Garnaut’s column in today’s Australian Financial Review that government “must not be captured by private interests.” It is just the sort of article that seems sensible, and so seeming, is utterly perilous for welfare of ordinary Australians. Why?

The most insidious of the lines in his argument is, by our reckoning, this:

It is important that the current noise eases into constructive discussion of the public interest, in which resource sector perspectives are expressed and over time understood, without crowding out the representation of the public interest.

Quite obviously Garnaut suggests that it is in the public interest for Australia to pass some kind of resource rent tax in order to move toward a “more equitable distribution of income, in a way that has lower economic costs other than other measures to promote distributional equity.”


Leaving aside the issue of what it means for a government to base policy on promoting “distributional equity” rather than just, say respecting property and contract rights, Garnaut’s argument has one humongous embedded assumption, from which another erroneous idea necessarily follows.

The assumption is that there IS such a thing as the public interest. It follows that once you’ve established that there IS such a thing, it is the government’s job to protect that interest against presumably nefarious, greedy, and rapacious private entities whose pursuit of their own benefit damages the public interest.

What utter hogwash.

You do have to give credit where credit is due, however. He has deployed an enormous amount of bright shiny red alluring linguistic lipstick on this pig of an argument. It sounds sensible, even if at an underlying logical level, it’s self-evidently absurd.

But rather than just assert its absurdity we’ll say that there is no public interest. That is a term used mostly by lawyers, litigants, and policy makers who seek to justify action that would it be illegal to take against an individual. Thus, you have to fabricate and elevate a higher theoretical authority: the public interest.

Before we get to the exact definition of this logical fallacy, a sensible objection should be answered: aren’t there some things that promote the general welfare better than others and shouldn’t we promote them?

The answer to that is unequivocally yes! And the market system does promote them through the responsible stewardship of private property. People take care of what is theirs. This is proved by the tragedy of the commons, in which public property is trashed because no one takes (or has) ownership of it.

What promotes the general welfare is a sound rule of law that protects individual liberty from the predations of the legislature. The general welfare is best promoted by people being free to pursue their own interests under the equal protection of a transparently made and enforce law. What promotes the public interest is the guarantee of private freedoms.

Or if you want to use the lingo of the Statists, positive policy outcomes are achieved by promoting personal liberty and the rule of law. The “public interest” is in having predictable and impartial rules that don’t unexpectedly or unfairly tax people for their success but punish them when they transgress the rights of others. To the extent that there IS a public interest at all, then, it’s ensuring the rights of the individual to life, liberty, property, and the pursuit of happiness.

Yet Garnaut’s argument, in the way public interest is defined, sets a hypothetical interest of “all society” at odds with firms and individuals and then makes the government the designated and morally enlightened guardian of what’s good for the public.

But again, if there were such a thing as the public interest, it would probably be in protecting private citizens from the legislative and regulatory whims of those who govern them. Or preventing the government from conduction illegal searches and seizures, or prohibiting the establishment of religions, or of the right to peaceably assemble.

This is why so much of the foundational law of free societies is “negative law.” It is a prescription on what the government cannot and must not do. Bills of rights and charters don’t define, generally, what individuals can and cannot do. They usually define precisely the limits of government power. It’s in the public interest to protect individuals from the predations of government.

That’s a bit of political and legal theory. But logically, Garnaut is guilty of what our old classical rhetoric professor would have called the “fallacy or reification.” He has “thingified” the concept of the “public interest” and pretended as if it’s a real thing that has real enemies (the miners) and must be defended by real people (enlightened policy makers).

It’s pretty presumptuous, really. Do the people of Australia own their land? Does the Queen of England? Or do private investors own it?

As a legal alien, there’s only so much we know about who owns what around here. If it’s the people of Australian, then it follows that any non-indigenous Australians owe, and could be coerced into paying, a rent tax to indigenous Australians. Doesn’t it?

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. In my mind, we’re not going to get any traction on the RSPT destruction until someone has the guts to stand up and say ‘this concept that the minerals are owned by all Australians is false rhetoric, the miners paid the rights to mine it, therefore it is private property’.

    For, if we all own the minerals, then do I not own a share of some real estate on Point Piper? When can I expect my land-rent cheque from the residents of that particular patch of dirt?

    Someone has to skewer this populist robin-hood nonsense the government is spouting. 20 years after communism died a twitching death, and somehow we’re back to confiscating private property, central planning and everything being owned by everyone? How did we get here so fast from 3 or 4 years ago when everyone agreed that a government in surplus, that encouraged business was officially a good thing?

  2. Steve’s quote of the day

    “Steve is looking foward to all the foreigners from China starting to panic seeing the Australian dollar collapse, getting scared then selling off all their investment properties”

  3. Now we are back on solid soil!

    But is it a matter of soil or a planning permission/da? The black fella says no one owns the soil and any good cocky will tell you that he is right, and an expat returning home and seeing that red soil out of the plane window will too.

    There is more to it than the risk in digging it up if you scar the earth and the water table or steal sub artesian waters, and where is Ayn Rand when we insist on a competitive bid process for the right to do it? So there is a a nation state with legitimate interests and a rent. Whatever rent is feasible in a real world global sense should be as close to an equity stake as is feasible but being one that is not accorded voting rights. That shares both the risk and the return.

    And the same should apply to a Frank Lowy for the planning rights to build a shopping centre or a developer seeking to rebuild a 4 story hotel into a 12 story hotel. First approve the plan and then run a competitive bid for the permission with the originator refunded the cost of developing the plan.

    Look after the herd, where the individual should be always remain statistically safer than the predator. The thundering herd you might say!

  4. Real estate at Point Piper is essentially a non consumable and transferrable asset. There are restrictions on what the owner can do with that asset which arguably protect the common public interest. You cannot open cut mine your land at Point Piper and export the yield – you can’t even cut down certain trees – which are replaceable!!! There aren’t many restrictions on what China can do with our ore or coal and we are exchanging ever appreciating, irreplaceable resources for ever depreciating and replaceable DVD players, cars, TVs and, (ironically) mining infrastructure. I think the government should have marketed this tax a bit more thoughtfully. Perhaps the “Irreplaceable Asset Exportation Tax” may have met less resistance…

    May 22, 2010
  5. Claytonator, we aren;t the only available resource in the world, and if we are we haven’t got the guns to protect it. We have to be competitive. Biker says we are competitive but he is being humble, WA is competitive, QLD would be nearly competitive with a massive kick up the labor bum.

    Now lets talk about ticket clipping & Point Piper (I live within 1km). If you are a local you would have seen what that clutz did to that tree on New South head Road to get a view from his McMansion, you would know how butt ugly Symonds pile is, and you would know how they have stolen the foreshore and keep it illegally and block access to the natural high tide line only due to influence peddling. Ask the local Turnbull the brat how much woyuld be generated from clipping the ticket of ETS “trading”.

  6. “Biker says we are competitive but he is being humble…”

    Just quoting a source, perhaps no better than any other, Ross. The internet offers a pretty diverse range of such sources and opinions, from which we all patch together a view of what _might_ be happening out there… .

    Re China: I think it’s a place we’ll have to travel through ourselves, soon.
    Maybe ship a bike there and spend a few months getting our own perceptions together. We turned back at Burma last time we went overland, so maybe we’ll then bike down to Singapore…

  7. claytonator, you missed my point by a country mile.

    ‘We’ as in the state governments of the land, already receive royalties for minerals dug up and exported. For this, ‘we’ assume no risk of loss, it is a simple and proven way of obtaining value for resources removed permanently.

    The new tax is effectively a nationalisation of the mining industry. Wayne and Kevin won’t show up on the list of shareholders, but they get to keep 40% of profits and suffer 40% of losses. Sounds very much like a shareholder : if it walks like a duck, quacks like a duck… Government taking forced ownership = forced nationalisation = Chavez, Mugabe, Soviets, etc.

    You’re being obtuse if you do not see this for what it is : a socialist based profits grab to transfer wealth away from resource rich states (WA, QLD) and back to populous but struggling states (NSW, Vic). It’s being done for cheap political points to start a class war using politics of envy, and to fill in a hole in the budget caused by excessive spending when there wasn’t the income to match.

    Point Piper was not used to discuss owners actions, rather, the concept that ‘we the people’ own everything, even if it has been paid for by a private individual or company. It’s not an issue of renewable or trees or high water marks : when does ‘private property’ stop being private property? I’m under the assumption that if I purchase something it’s mine, and I can keep any benefits from that. That is the basis of risk taking and the underlying structure of the Australian economy. If you purchase something but don’t really own it if other people really want it too, then I want to go and pitch a tent on John Symonds front yard and enjoy the view. After all, it all ‘belongs to the people’ despite Symonds paying handsomely for it.

    I’m using this absurd example to drive home the point that the mining companies already have paid and continue to pay royalties to mine the land. They pay the royalties, they get the rights to the minerals and any profits flowing from that.

  8. Well said brc,
    The minerals in the ground do belong to all Australians until Australia sells the rights to them to the mining companies. Then they belong to the mining companies to do whatever they like with. If that involves digging them and selling them for a profit then they should be taxed at the same rate as any other company that makes a profit. If the government thinks they should be getting more for the minerals then they should be selling the rights to mine them at a higher price in the first place. This RSPT is nothing more than a attempt to try and plug a big hole in a federal budget that is trying to spend too much. Without it Rudd would have to cut spending in his socialist vote buying agenda or prolong a politically unpopular deficit. They hit the big miners with it in the hope that the ordinary “working families” would want to slug it the fat cats without ever realising the real consequences it would have on them both directly and indirectly. This doesn’t look like its gonna fly now and hopefully, Australians will see this for the unfair, anti-capitalist and “Unaustralian” trick that it is and vote accordingly at the next federal election.

  9. brc, the aesthetic is owned by the community. Seeing cities with great architecture in both public and private space is to see wealth and innovation and it has been the same since we thought ourselves out of prehistory. Land use in an urban ennvironment and even a rural environment is more complex than a notion of personal ownership. On one hand land use is a custodianship of the land. In rural areas if you annex water sources or strip the nutrients out of the soil to take crops and let the water table rise you steal not only from your grandkids but your neighbours and community. In the city if you build something butt ugly you not only steal other people’s vistas but you blight the community. If the state buys three houses surrounding yours and puts up a Seidler like housing commission estate when the rest of the surrounding streets is owner-occupier you might be the first to change your mind on where the limits lie. The foreshore issue is simply theft … nothing else. Keating’s dirty bomb narrative that went up on unlocking state owned port land by kicking all the commercial infrastructure out of the development corridor has left Sydney Harbour a desert and ripped the heart out of one of the world’s great harbour cities. I look out every day and see nothing, no vibrancy, no people, no commerce. And besides the pool I think Hearst’s castle is a shocker but it has alot on Symond’s pile. Personal taste and freedom of use is fine but planning permission and DA must have transparent limits. In my book the community has a stake in the planning permission, and for commercial use premises, and especially “natural monopoly” planning permissions like shopping centres, or turning low rise sites into high rise sites, the developers should bid for the right to the development pre-approved by the community.

  10. Oh, and here is another trap the cronies of the old left and right are trying to set the tea party movement displayed in the link below.

    The US civil rights act. Same story, if businesses operate in the community, same as the Westfield shopping centre, community rights to planning permission licence must apply. Therefore you don’t have the right to discriminate against blacks. This is what Goldwater never got on top of. Failure to recognise the right of the herd to collective security vs what should be a far higher risk environment for the individual predator makes Ayn Rand wrong. The problem is that the security is going to the predators rather than the prey by crony capture of constitutional democracy. It doesn’t mean the individual doesn’t have rights to be free once a basic planning permission charter is transparently agreed, that there should not be protection from govt clawback, executive / academic expansion, and thus creeping socialism.


    May 24, 2010
  12. Krudd reckons this new RSPT will transfer $9 billion out of profits of the miners & into the pockets of ‘aussie families’. How bout leaving them alone to continue carrying the country through the so called GFC and just getting rid of the negative gearing tax rort instead. That should bring in extra 8.6 billion a year and help equalise wealth distribution a little more.

    pumpkin head
    May 24, 2010

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