US President Obama Battles China for Australia Relations


Big Dog in the Pac

US President Obama is in da house! And he’s received a pretty warm welcome since stepping through the door. (Although China isn’t over the moon about his trip to Australia) it’s a nice change for the president. He’s not too popular at home.

That’s because he’s, err, presiding over the highest unemployment levels since the great depression. Obama’s level of spending makes FDR look like a tightwad.

Since Obama assumed power in January 2009, total US government debt has grown by $4.4 trillion. It just crossed another moving line in the sand – the $15 trillion mark. It’s now just $200 billion below the recently increased debt ‘ceiling’.

At the rate the US government is spending money to prop up a structurally deficient economy, the old debt ceiling debate will be back in the headlines within a couple of months.

But Australians (we don’t mean you, dear reader) are largely ignorant of Obama’s failings. He appears to be a good bloke so we take him at face value. Perhaps we (like the people who voted for him) want to believe that good guys can succeed in politics.

But in politics, good guys who try to make a difference are dangerous characters. They try to shape society based on how things should be according to them. And because they get to spend other people’s money to do so, they rack up enormous debts in the name of trying to make things better.

As the saying goes, the road to hell is paved with good intentions.

What is Obama doing here anyway? On the surface, it’s a symbolic visit to deepen military ties on the 60th anniversary of the defence treaty between the US and Australia.

At another level, it’s about the US reasserting its power in the Pacific. It’s a direct show of intent to China that the US intends on being the big dog in the region for decades to come.

This is an important point for Aussie investors.

US Speaks Mind to China

US President Obama has displayed some pretty strong language towards China recently. He’s told China it must play by the rules and grow up. He’s committed to building up a small but symbolic military base in the Northern Territory over the next few years.

This suggests a change in US perception of China’s strength. A few years ago the US would never have used such language. Now, in a post-credit-crisis world, the US is by default looking relatively strong, while the fragility of China’s centrally planned economy is becoming more evident.

The US knows it too. China’s inflation problem, while subsiding, is directly related to its loose peg to the US dollar. Bernanke’s QEII policy exported inflation to China and forced it to tighten monetary policy. These tightening steps have now pricked the property and fixed-asset investment bubble.

China’s economy has historically unprecedented imbalances. While the central planners will try to sustain these imbalances for as long as possible – and therefore provide an illusion of growth – the reality is that most of China’s growth is uneconomic. That is, the returns on investment are less than the cost of capital. When that happens, assets turn ‘bad’.

This is happening at the same time as China’s famed export powerhouse weakens. Its largest customers are tightening their belts. In the three months to September, China’s current account surplus came in at U$57.8 billion, a 43.5 per cent fall on the previous year.

In more signs of overcapacity in China, Bloomberg reports of low hotel occupancy rates:

China’s occupancy rate was 61 percent in the first nine months of this year, the same as the year-earlier period and the lowest in Asia after India among 15 countries tracked by STR Global, a consulting and research group. In Shanghai, only about half of hotel rooms were filled, compared with more than 80 percent for Singapore and Hong Kong, it said.

But everything is ok according to a recent report from the IMF…sort of. The organisation said a recently conducted stress test of the 17 largest banks in China suggested they would be ‘resilient to isolated shocks.’

Actually, isolated is the important word here. The following is from the IMF’s explanation of the stress tests in the executive summary.

Such shocks included a sharp deterioration in asset quality, a correction in the real estate markets, shifts in the yield curve, and changes in the exchange rate. If several of these risks were to occur at the same time, however, the banking system could be severely impacted

What are the chances of just one of these things occurring? Exactly.

But the China implosion is a story for 2012. In the meantime, we have the Eurozone implosion.

Greg Canavan,
for The Daily Reckoning Australia

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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5 Comments on "US President Obama Battles China for Australia Relations"

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4 years 11 months ago

Watch the Phillipines, recently a man with a US friendly family name went cap in hand to China seeking investment; all the US send them is anti insurgent “trainers”.

A banner in the Guardian recently read “Clinton to China, you’re next!”

Its a foot race between a domestic revolution in the US and a new world war.

Alan Unsworth
4 years 11 months ago

As an American, I have to wonder at Obama’s timing. Did he just wake up to China’s expanding power? Or is he striking a militant pose abroad, in order to head off criticism from the Republicans at home?

Jim Momoko
Jim Momoko
4 years 11 months ago

If you US didn’t spend all their money on the war, they wouldn’t have to raise the debt ceiling. They either have to raise the debt ceiling or cut spending costs or China might take over. If you don’t know what the US debt ceiling is, this article gives an awesome explanation on it.

Patrick Donnelly
Patrick Donnelly
4 years 11 months ago

America is sabre rattling. About time!

Beware the tsunami weapon. Aceh was bad enough, but the economic and strategic damage done to Japan is grave.

China warned USA in 2005 about using it on them, but they shut up very wuickly after evaluating risks to them and the USA.

Ned S
Ned S
4 years 11 months ago

Barack Obama thinks US house prices are unreasonably low and should go up – His bankers laugh at him.

Wen Jiabao thinks Chinese house prices are unreasonably high and should go down – So they do! :)

Barack Obama’s mob have 15 trillion in foreign debt.

Wen Jiabao’s mob have 3 (or is it 4 now?) trillion in foreign reserves.

Barack Obama loves freedom.

Wen Jiabao knows what is required to have freedom.

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