by Marc Lerner
Several of the big names in the hedge-fund community have
recently written letters mentioning their views on China and the impacts its
slowing could have on Australia. In his latest letter,
Kyle Bass says that Chinese growth “appears to be stumbling dramatically” and
that the scale and pace of credit expansion in China over the last 5 years is
“truly staggering”, with the rate of credit growth now 3 times total credit
system growth the US had at the peak of the bubble in 2006. He discusses the
view his fund now holds that a limit has been reached in terms of how much
credit expansion in China can now filter through into real economic growth and
wealth creation, as the newer debt is being used to maintain balance sheets
rather in an environment of slowing growth than into productive new
investments. He also says that a significant slowdown in China would have
“devastating” impacts on marketplaces leveraged to a continually booming China
such as Brazil and Australia.
Hugh Hendry, a well-known Scottish manager who has
previously discussed his views on China (similar to Bass’), mentions in his latest
letter that his fund has been investing with the view that the Reserve Bank
of Australia (along with that of South Korea, another economy heavily leveraged
to China) will continue to cut short-term interest rates aggressively, faced
with “ rapidly deteriorating
domestic consumption and international trade activity”.
In other news relevant to the thesis of a slowing China (and
consequently Australia), there have been recent reports
of sharply falling rents in mining towns in Western Australia as mining
investment slows. In Karratha rents have fallen for seven quarters in a row,
falling almost $500 a week, while in Port Hedland and South Hedland, the number
of properties available for rent rose 37 percent during the June quarter. At
Valor Private Wealth, we think this trend is likely to continue and worsen,
although its severity may be reduced if the dollar falls sharply and far enough
that Australian manufacturing, agriculture and tourism are able to make a
strong rebound, so that those in the mining industry who have heavily geared
themselves into properties in WA can continue to pay off their loans as they
find jobs in these other industries. If the dollar stays high, it will mean
those whose incomes come from the mining boom will have trouble finding work as
the mining investment boom unwinds, with potentially negative implications for
the banks who have lent to them, and the housing market throughout the rest of
the country (through flow-on effects such as reduced lending elsewhere by the
banks and negative effects on the rest of the economy of the end of the mining
boom).
In contrast to this depressing trend, a new
report has found that Google – one of our largest holdings for our clients
– now accounts for 25% of all consumer Internet traffic in North America, up
from about 6% three years ago. Whilst this report draws on only some Internet
Service Providers (ISPs) and thus only represents an estimate of total traffic,
the figure is nonetheless very, very impressive. We are very happy to hold our
client’s money in growing, global leaders rather than focussing purely on local
mining and banking stocks leveraged to an entirely unsustainable, credit-driven
fixed asset investment boom in China.
