By MoneyMorning.com.au
You may have noticed we have a habit of banging on about something until we’ve bled it dry. We know we should try and mix things up… give you more variety… but, well, that’s just the way we are.
When we get our teeth into a subject, it’s hard to let go.
Yesterday we noticed this story from Bloomberg News:
“China, the world’s second-biggest economy, is heading towards a soft landing, speakers at the Bloomberg Link China Conference in Hong Kong said.
“A hard landing is a ‘distant scenario,’ Liu Li-Gang, head of Greater China economics at Australia and New Zealand Banking Group Ltd., said at the forum today. China’s consumption is ‘very strong’ as wages jump, backing economic expansion, said John Tang, China strategist at UBS AG.”
Funny that. Speakers at a “China Conference” claiming the Chinese economy won’t crash.
But that’s fine. Just as we don’t expect too many speakers at the Sydney Gold Symposium to say we should sell gold because it isn’t worth anything.
[Ed note: If you haven’t registered for the Sydney Gold Symposium on 14/15 November, you can register by clicking here…]
While our view is gold will go higher, we’ll still be sceptical if someone claims gold will reach $40,000 by the end of next year…
In the same way we were sceptical when Royal Bank of Scotland and Goldman Sachs analysts told the Australian Financial Review in January that the Aussie S&P/ASX 200 index would be higher than 5,600 points by the end of the year.
Today the index is around 4,200 points. It needs to gain 33.3% between now and 31 December to reach that target.
That’s why it always pays to listen, but do some of your own homework on the subject as well.
After all, saying China will keep growing because it’s still growing is like saying a balloon won’t pop because it’s still expanding! Both statements are only true until they’re no longer true.
But now we’ve got a new ally. Dr. Nouriel Roubini has joined the China “hard landing” crowd. Dr. Roubini is one of the few economists who correctly predicted the global financial meltdown in 2008.
And now he says Australia will be in trouble if (or in our opinion, when) the Chinese economy crashes. According to the Australian, Dr. Roubini said:
“If China has a hard landing, for a period of time that’s going to hurt growth and reduce commodity prices until China recovers and until the rest of the world recovers.”
Of course, just because Dr. Roubini says it, it doesn’t mean it’s true. But it adds weight to the argument that China can’t avoid a big economic downturn… and if that happens, Australia will suffer.
But what of the idea that China has a whole bunch of savings to draw from?
Money Morning reader, Peter sent us a note a couple of days ago. He wrote:
“Chinese save a significant portion of their salary, and now they are allowed to buy gold and silver, a considerable amount of wealth is literally going under the bed and not into bank accounts.”
It’s true the Chinese are buying gold. Our old pal, Diggers & Drillers editor, Dr. Alex Cowie has written to his subscribers about it. But it’s still a tiny proportion of saving.
Let’s put it in perspective. China’s official gold reserves are 1,054 tonnes. At today’s gold price it’s valued at USD$57.6 billion. By contrast, China holds USD$1.1 trillion of U.S. Treasury bonds…
In other words, China’s official holding of U.S. paper assets is more than 20 times larger than its gold assets.
Also, let’s not forget that for every dollar saved in a Chinese bank account, thanks to fractional reserve banking, there are many more dollars issued in loans on the other side of the ledger.
And if Satyajit Das, author of Extreme Money: Masters of the Universe and the Cult of Risk is right, China’s savings may not be as secure as most think. Asked by a Bloomberg News reporter, “How can a land as large as China run such a surplus?” Das replied:
“It’s unsustainable. That’s the lesson we should have learned from 2007. We instead shovelled everything under the carpet, and it’s going to come back to haunt us. China’s going to have to write off its $3 trillion.
“…Why wouldn’t they [the Chinese] suddenly turn around and say, well, we lent you $3 trillion and you’re not going to pay us back. So we’ve written it off and we won’t buy any more U.S. Treasuries until the U.S. reforms its fiscal position.”
Will anything that extreme happen? It seems unlikely. But then again, according to the U.S. Treasury, China’s holding of U.S. Treasuries was the same in August 2011 as it was one year before… USD$1.137 trillion.
Of course, China hasn’t had to buy Treasuries this past 12 months… because the U.S. Federal Reserve has been in the market as the biggest buyer of government bonds.
So let’s not get too excited about China’s savings. Most savings in the modern banking system aren’t backed by anything other than someone else’s debt.
If the savings really were “under the bed” in gold bars then we’d happily accept China’s savings could cushion it from an economic downturn.
But it’s not. China is no stranger to debt. Its banks have used debt to fuel land, construction and commodities speculations. None of those are safe bets.
Put simply, while Chinese savers may think their savings are held safely in a bank, in reality they’re putting their cash into what are little more than highly leveraged and speculative hedge funds.
And as you’ve learnt before – as recently as 2008 – there’s no way such risky investments will result in a happy ending.
Cheers.
Kris.
