Posts Tagged ‘China’

Do you think China will crash soon?

Thursday, August 5th, 2010

Today, we will be doing something a little different. Instead of us doing the talking, we will let you discuss and brainstorm this question.

A little background about this question. In many of the interviews with Marc Faber, he correctly predicted that China will slow down. Furthermore, he suggested that there’s a possibility that China may crash, though he stressed that he’s not predicting that it will happen. Interestingly, he mentioned about “loan-sharking” creating credit problems in China:

Well, I?m not sure. Because if [the Chinese government]? ease off again, the speculation [of property] will go on. But we have credit problems in the property market undoubtedly. We have Ponzi schemes like of loan sharking operations all over China. That?s a very dangerous, and so forth.

We find the word “loan sharking” very interesting. It seems to imply something about the Chinese credit market that is by definition, underground. That is where Black Swans lie.

On the other hand, one of our readers, Paul, who lives in Beijing, has different views about China (see Concerns about China?s slowdown):

It takes years to understand the Chinese psyche, and it’s virtually impossible to get even close from outside the country. Yes, there’s a correction going on, but it’s controlled at the core. Outcomes and reactions will of course be wild and woolly, such as the steel production slowdown.

As for ghost cities, well of course, if you don’t understand how the chinese work, you will think they are ghost cities. But that’s how they do things here – they build the whole damn thing, then move the people in. As I said, you have to understand the Chinese way of thinking.

Put this in your diary. The restrictions will last until November. By December this year, production of key items such as steel and cement will be returning to full pelt.

So, do you think China will crash soon? Please vote below and feel free to contribute your opinions.

Concerns about China’s slowdown

Thursday, July 22nd, 2010

Back in April, when economic ?experts? were expecting further growth in the Chinese economy, we wrote in this article that

Contrarian investors like Marc Faber believes that the Chinese economy will ?slow down regardless? any time from now on. Whether this slowdown will be a nice soft-landing or a gut-wrenching crash is another matter.

Marc Faber was on record for saying that there?s a possibility that China may ?even crash.? How could the pundits missed the signs that something is really wrong with the Chinese growth in 2009? As we wrote back then, there were plenty of signs:

? there are massive excess productive capacities in the Chinese economy. As we wrote in Is China going to dump their excess metal stockpiles?, there are eye-witnesses? reports of ghost cities, vacant office blocks and apartments in China. It had been reported that China?s excess capacity for steel and cement production is around the current capacity of United States, Japan and India combined. All these points to a massive mis-allocation of resources in China, which according to the Austrian School of economic thought, a pre-cursor to a bust (see our free report, What causes economic booms and busts?).

That?s why, as we wrote in Chinese government cornered by inflation, bubbles & rich-poor gap, the Chinese government will have to rein in their runaway economy sooner or later (e.g. through administrative means, revaluation of the yuan). The longer they delay, the bigger the inevitable bust will be.

Today, the financial markets are finally noticing that China is slowing down more than expected. For example,

  1. Rate of decline for Chinese industrial production is more than expected.
  2. And if Chinese government statistics can be believed, even the inflation numbers were below expectation.
  3. Spot iron ore prices have been in free-fall since May.
  4. Steel production has now fallen to its lowest rate of growth since 2001.
  5. The Baltic Dry Index has lost more than 50% in one month.

Back in January, when we wrote Chinese government cornered by inflation, bubbles & rich-poor gap, we were wondering when the Chinese government will bite the bullet and rein in the runaway economy. We didn?t have to wait long to see it happening.

The question that the pundits and the financial markets will be wondering is this: will this unexpected rate of slowdown continue for rest of the year? Will it continue on to 2011? If they get it wrong (again), it goes to show that they have underestimated the resolve of the Chinese government to cool down the economy.

The risk is that the Chinese government may accidentally let the slowdown turn into a crash. We shall see.

Think Greece is bad? Look at China’s provinces

Sunday, June 27th, 2010

We all hear about how bad Greece?s national debt is. We hear about how the rest of the PIIGS countries are threatening to derail the Euro. Then there?s Japan, followed by UK. Also, most of the US states are like mini-Greece (see Inside the Dire Financial State of the States). Worse still, the US Federal Government itself is projected to face bankruptcy. You can see the who?s who list of potentially bankrupt major governments in our previous article- Next phase of GFC is when governments go bust.

But no one looks at China. Since it is the world?s greatest creditor nation, surely its fiscal position must be solid right?

No!

Firstly, China?s US$2.4 trillion of reserves must not be mistaken as ?cash at bank? to be spent (see Is China allowed to use its US$2.4 trillion reserve to spend its way out of any potential crisis?).

Secondly, many Chinese local government are heavily indebted too. According to Liu Jiayi, the head of China’s National Audit Office, some Chinese provinces have serious debt problems. As this news article reported,

Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc.

He said the audited debts of 18 of China’s 22 provinces, together with 16 cities and 36 counties amounted to 2.79 trillion yuan (?279bn) in 2009.

Several observers believe the situation is far worse. The China Daily newspaper, which is run by the government, suggested that the total sum could add up to between 6 trillion and 11 trillion yuan (?590bn-?1.08 trillion).

Victor Shih, a professor at Northwestern University in the United States, believes the sum in 2009 was 11.4 trillion yuan, equivalent to 71pc of China’s nominal GDP.

Mr Shih has warned that local governments have also succeeded in rapidly funnelling large amounts of debt off their balance sheet and into public-private investment vehicles.

Mr Shih forecasted that by next year, China?s government debt will hit 96 percent of GDP as ?infrastructure projects continue to eat up cash and produce negligible returns.? According to him,

The worst case is a pretty large-scale financial crisis around 2012. The slowdown would last two years and maybe longer.

The good news is that the Chinese government is doing something about it today. But we doubt it will be painless. Fingers crossed on that one.

Is the Chinese export surge really good news?

Monday, June 14th, 2010

Last week, the mainstream financial news media was cheering on the news that China’s exports surged on a year-on-year basis. This led to the belief that China’s economic recovery is on track, which implies that the recovery in commodity demand will be sustained, which will then flow on to the Australian economy. As a result, according to media narrative, the stock market rose on that ‘good’ news.

But before we get carried away with this bout of optimism, let us put on our thinking caps and consider the bigger picture. Firstly, is the surge in Chinese exports and imports really a good news for Australian mining companies? To answer this question, consider this news article,

But rising textiles and electronics exports will do little to offset the slump in Chinese demand for Australian commodities that will come with an expected construction slowdown.

Construction starts for government infrastructure projects have slowed sharply and private sector transactions have been bludgeoned by government measures.

Private sector measures show real estate transactions fell by as much as 70 per cent from April to May in Beijing, Shanghai and Shenzhen, where policy restrictions have been most severe.

To put it simply, China’s demand for Australian commodities post-GFC is mainly influenced by China’s construction ‘boom’ in 2009. It is open knowledge that there’s overcapacity in China’s steel and cement industries. As we wrote in Marc Faber: Beware of investing in Australia (as it follows the Chinese business cycle),

It had been reported that China?s excess capacity for steel and cement production is around the current capacity of United States, Japan and India combined.

A rise in Chinese exports will not be likely to offset the slump in construction.

Next, when you look at the big picture in mind, an export surge is the last thing the world needs. In the this post-GFC world, where growth is anaemic and unemployment is stubbornly high, countries are covertly engaging in competitive currency devaluation in order to prop up their exports in order to prop their economies. The Americans wants to re-balance their? economy with more exports, which implies other countries have to import more from America. Yet, on the other side of the Atlantic ocean, as Niall Ferguson said in this recent interview, the Germans are shedding crocodile tears over the falling Euro because that would boost their exports, which in turn is good boost for their economy. As Marc Faber said in this interview, a falling Euro (i.e. rising US dollar) will give the Americans the excuse to print money to give their economy another adrenaline boost.

Unfortunately, growth-via-exports is a zero-sum game because a for every export, there is an import on the counter-party. If every country wants to increase their exports to boost economic growth, who’s the one doing the importing? Thus, China’s export surge is one step in the wrong direction. The world needs a rebalancing of exports and imports, not more of the same unsustainable imbalance.

Already, the Americans are murmuring about this ‘good’ news. As? China export surge stirs U.S. anger reported,

A surge in Chinese exports and rising anger in the US Congress will put renewed pressure on China to allow its currency to rise against the US dollar.Chinese trade figures showed exports leaping by 48.5 per cent in May over the year before, way ahead of analysts’ forecasts. Data released in the US showed America’s trade deficit widening slightly in April, with some economists arguing that the improvement in net trade and its contribution to US growth appeared to have stalled.

The data gave more ammunition to China’s critics in the US Congress, who have said they will proceed with legislation to restrict Chinese imports to correct the perceived misalignment of the country’s currency. The US Treasury has been pursuing quiet diplomacy with Beijing to allow the renminbi to rise, but lawmakers said they were losing patience.

In the bigger picture, rising trade tensions between the US and China is moving them towards trade war. This can hardly be good news.

News report of Chinese crowd buying gold

Thursday, May 20th, 2010

A few years, we advised one of our Chinese friends to buy gold. Back then, there was a craze among Chinese investors to invest in stocks (and mutual funds). Our friend queued up at the bank and asked to buy gold. The lady behind the bank counter then laughed at our friend.

?You want to invest in gold?? she asked, being amused. ?Nobody invest in gold!?

Fast forward to 2009.

The property bubble in China was powering ahead, after a brief disruption in 2008. Then in 2010, the Chinese government began to crack down hard on property speculation (see What if China crashes?). Hence, as we wrote before in Will a crashed Chinese property market lead to an embrace of gold? Part 2- Store-of-value function, it becomes very logical for the Chinese to move their speculation from property into gold.

Today, we see this news report (notice what one of the lady said about one property of gold that is not present in property):

As Paul, one of our readers said,

Any hint of softness in price will cause the Chinese to stop buying. Conversely, any hint that the price is set to rise, and they will rush in.

Once gold enters the mainstream imagination of the Chinese people, you can imagine what will happen to gold prices. This could be the beginning of the trend.

How to buy and invest in physical gold and silver bullion

Will a crashed Chinese property market lead to an embrace of gold? Part 2- Store-of-value function

Sunday, May 16th, 2010

Today, we will continue from Will a crashed Chinese property market lead to an embrace of gold? Part 1- Chinese characteristics of property market. As we discussed in that article, our question was,

What if the Chinese government succeeded (whether accidentally or deliberately) in smashing the store-of-value function of property?

There?s no guarantee that the Chinese government will be strong-willed enough to let the property bubble burst. Some China pundits reckoned (e.g. Michael Pettis) that its policies will vacillate from one extreme to another, switching between the brakes and accelerator quickly, as the reality on the streets veer from inflation to deflation and back to inflation. If this is so, the developments will become unpredictable and volatile, which is where we will expect negative Black Swans to spring surprises.

Also, there is a risk that the Chinese government may react one second too late, letting the property market fall into a tipping point whereby price deflation becomes irreversible. This can happen because according to Patrick Chanovec (an associate professor at Tsinghua University’s School of Economics and Management in Beijing), supply and demand do not drive property prices in China (see China: gigantic property bubble in the midst of exploding supply of vacant brand new homes). Instead, property serves a store-of-value function, which is a function that is supposed to be served by money (traditionally gold, but it?s fiat currency today). Once property no longer serves this function, prices will fall to reflect supply and demand.

The problem is, if the Chinese currency does not serve the function as store of value, and there are limited investment avenues (e.g. stocks are too volatile), then what else can take that function? Logically, the answer is gold. Already, according to a recent report from China?s CCTV, some Chinese investors are switching from property to gold. In a recent interview, this is what Patrick Chanovec commented regarding this new development:

It?s open knowledge that since last year, the Chinese government encouraged its people to invest in physical gold, even to the point of letting TV ads do the talking. Will the Chinese turn their attention to gold as a store of value? This is a very interesting question. We will see.

How to buy and invest in physical gold and silver bullion

China: gigantic property bubble in the midst of exploding supply of vacant brand new homes

Thursday, May 13th, 2010

Today, we planned to continue from our previous article (Will a crashed Chinese property market lead to an embrace of gold? Part 1- Chinese characteristics of property market). But one of our readers, Paul, emailed us a couple of very informative comments (which we’ve posted on the comments section of that article). With his comments, we feel that we have further points and observations to add, which requires a separate article. Please note that our observations of the Chinese property market are made from the point of view of a foreigner, which may not be entirely accurate or correct. So, please feel free to correct us if we are wrong.

In Paul?s second comments, he wrote

Personally, I find it amazing that they would not want to have a tenant in the apartment and collecting rent on their investment, but no, most private landlords look only at the long term capital appreciation.

To add to his comment, we have some interesting observations that may perhaps explain such strange behaviour in China’s property market. You see, in Australia, when you buy a brand new home, it is mostly done up (e.g. complete with kitchen, oven, tiles) and ready to move in. In China, brand new homes are usually ‘raw’ (e.g. no tiles, concrete walls)- you need further renovations before that home is ready for moving in. Obviously, landlords cannot rent out ‘raw’ homes because they are unliveable. That’s where the Chinese mindset differs- if the ‘raw’ home gets renovated (so that it is ready for moving in), that ‘raw’ home is no longer ‘brand new.’ As our reader said,

… it is very difficult to negotiate deals in the secondary market or rental market.

Once a home loses its ‘brand new’ status, it loses value and goes to the secondary market. Given that the secondary market is extremely weak in China, it explains why Chinese property speculators rather keep their apartments ‘raw’ and un-renovated than to renovate it and rent it out (unless the rent is high enough to offset the loss in value).

Furthermore, we guess that the domestic rental market in China must be very weak because of the “account” system. In Chinese cities, families must own an city residency “account,” which qualifies them for government services, school enrolment, etc. The “account” is defined by the address of your owned home. The implication is that if you sell your only home (and consequently, have to rent another home to stay), you lose your “account,” which will be very disadvantageous to you. That probably explains why the rental market seems to be non-existent in China (except for foreigners and maybe for migrant workers who don?t have their own ?account? anyway). These characteristics explains why in China, there can be a gigantic property bubble in the midst of exploding supply of vacant brand new homes. It is very similar to what we wrote in Why oil cannot function as currency reserves?

Then the demand for tooth pastes will rise to the moon, not because the demand for oral hygiene increases, but because the demand for tooth-pastes as money increases. Not only that, no matter how much tooth-pastes Colgate produces, there will always be shortages because there will be mass-hoarding of them as money.

That is the consequence of monetary inflation, which undermines the store-of-value function of money. When residential property takes on the store-of-value function, the result is a gigantic price bubble in the midst of over-supply.

In the next article, we will continue the story from the previous article. Keep in tune!


P.S. Paul has this comment regarding this article:

Your comments about the condition of the home or office when sold new are true.?? For homes however, it is more usual to dress them.?? For offices, no.

But I want to pick up on your second part.?? By “account” I assume you mean “hukou”.?? If so, your facts are wrong.?? It is not based on the address of your owned home, but on where you were born.?? The original purpose of the hukou was to identify and control peasants.?? A person’s hukou identifies
whether they are a city person or a rural one, and is based on the province in which they were born.?? My Chinese wife was born in Xinjiang, but her parents came from Anhui and Henan.

Every Chinese citizen has a hukou.?? Rural migrants coming into the cities to find work still have a hukou.?? But it identifies them as being not from the city, making them ineligible for social security, schooling or other benefits.?? People with hukous from outside a city can buy property in that city.??? But the vast majority can’t afford to, because they are rural migrants looking for work.

One more point.?? Anecdotal evidence, but I present it just the same.?? My Chinese friends, and indeed my wife’s family, all wonder why I rent instead of buy.?? If possible, Chinese people will buy, as they see renting as a waste of money.??? They would rather scrape together the money from the family to buy a modest place than to rent.?? By the way, my wife’s brothers
own their own homes here in Beijing, despite them all having Anhui hukous.

If I may make one final observation, based on the work I do here.?? In a falling market, the Chinese will stay away in droves.?? They much prefer to wait and see how far it will fall, before making an investment or purchase decision.?? I consult to the global primary aluminium industry, and I see the same thing when it comes to raw materials.?? Any hint of softness in
price will cause the Chinese to stop buying.?? Conversely, any hint that the price is set to rise, and they will rush in.?? Hence why the Shanghai index has such wild swings.

Will a crashed Chinese property market lead to an embrace of gold? Part 1- Chinese characteristics of property market

Tuesday, May 11th, 2010

In our previous article, What if China crashes?, we wrote,

? the Chinese government seemed to be getting really serious about cracking down on property speculation, even to the extent that it is giving the impression that it wants the property bubble to burst.

Will the Chinese then rush to gold should their government succeed in cracking down in property speculation? To answer this question, we must first understand some things about the Chinese mindset on property and investments. Currently, interest rates in China are pathetically low- so low that they are below the price inflation rate. Because of their currency peg, the People?s Bank of China (PBOC) is constrained from raising interest rates (see Can China raise interest rates to control its property bubble?). Also, the Chinese are known to be savers.

So, that creates a problem. Imagine you are a typical Chinese saver. What if you want to save and the cash at bank is yielding returns that are below the rate of price inflation? That results in a very great disincentive to save your money in the bank and pushes you to ?invest.?

The next question is where can you ?invest? your money? Remember, a lot of other people are facing the same problem because the Chinese government?s policy of force feeding credit into the economy is creating a gigantic rain of freshly printed money- a lot of people are having too much money on their hands. Unfortunately, in China, with its underdeveloped financial system, there is not much avenue to ?invest? your money.

The range of financial instruments in the stock market is limited. There are hardly any derivatives available for you to short the market (but currently, stock index futures are on the trial phase). Not only that, the standard of disclosure and reporting has too much to be desired. Most average mum and dad stock investors in China can only take long positions on a stock market that is highly volatile and speculative (due to lack of disclosure). No wonder investing in stocks is not that popular in China.

Thus, the only investment outlet for this mountain of freshly printed money is the property market. There are a few characteristics of the Chinese property market that most foreigners will not know. Perhaps these characteristics explain why the property bubble in China is so enduring.

Firstly, the Chinese property bubble is definitely bigger than the property bubble in Australia. But you may be surprised to learn that the consumer leverage in the residential property market in China is in fact smaller than Australia. In China, you need at least 40% deposit to qualify for a mortgage loan. As Patrick Chovanec wrote here,

According to the latest statistics I?ve seen, approximately 50% of all residential purchases in China today are financed with mortgages, which are mainly provided by the big state banks.  That?s a sharp increase from just a few years ago, when nearly all such purchases were made in cash.  In theory, the rules allow 30-year mortgages, but anything longer than 20 years is rare, and the presence of high prepayment penalties tend to push buyers towards mortgages with even shorter terms (our own mortgage was, believe it or not, 3 years, which is more like an instalment plan!).

A lot of residential real estate transactions in China are made in cash!

Secondly, the secondary market for residential real estate in China is extremely weak. As Patrick Chovanec wrote here,

What we see in China, though, is an extremely weak secondary market.  In the U.S., the ratio of secondary to primary residential property transactions for the first half of 2009 was 13.45; in Hong Kong it was 7.25.  In China as a whole, that ratio was 0.26 (four times as many new home purchases as secondary sales).  Even in China?s most developed markets the ratios were just 1.30 for Beijing, 1.56 for Shanghai, and 1.35 for Shenzhen.

If you combine these two characteristics together, you can conclude that a lot of real estate purchases in China are made with relatively little borrowing (or none at all) on brand new homes. As a result, the Chinese are, as Patrick Chovanec wrote,

? in that sense, the people using real estate as a store of value, a place to stash their cash?

That explains why there is a lot of idle and empty apartments in China as more and more of them are being built by property developers.

But the fact there is relatively little consumer leverage in the Chinese property market does not mean that there?s little leverage in the property sector. In China, the leverage is placed on the shoulders of property developers. In other words, the Chinese property ?investors? are de-leveraging the developers!

Now, what if the Chinese government succeeded (whether accidentally or deliberately) in smashing the store-of-value function of property? We will go into that in the next article. Keep in tune!

What if China crashes?

Sunday, May 9th, 2010

Regarding the current drama in Europe, if the European authorities does nothing (or stoically refuse any thought on moral hazards), the world will get a GFC II, in which Australia may not be so lucky this time round. Our guess is that when push comes to shove, the Europeans will eventually print money and kick the can further down the road. After all, with the nightmare of the Panic of 2008 still fresh in their minds, they will not repeat the ‘mistake’ of acting too slowly. The outcome will be more moral hazards and monetary inflation, which is something we and our children will pay down the road.

Meanwhile, as the global financial markets are fixated over the current sovereign debt crisis in Europe, contrarian investors (especially Australian investors) should look at another part of the world for any potential mishaps- China. Starting from January this year, the Chinese government had been tightening the supply of credit. Measures include turning off the credit tap to increasing bank reserves requirements. Recently, unlike 2008, the Chinese government seemed to be getting really serious about cracking down on property speculation, even to the extent that it is giving the impression that it wants the property bubble to burst (see Is China’s Stock Market Crashing?).

As we wrote in Marc Faber: Beware of investing in Australia (as it follows the Chinese business cycle), with all these tightening measures, China will slow down this year. The question is, will the Chinese government accidentally over-tighten cause a crash instead? Remember, its objective is a soft-landing (which they managed to pull off in the 1990s under ex-premier Zhu Rongji). But will they end up going too far, resulting in a hard-landing?

Only time will tell.

But if it happened, you can sure that Australia will have a very ride. As we warned our readers a few months ago in Hazard ahead for Australia- interim crash in China,

Therefore, investors should understand this basic principle: because of the leverage that Australia is exposed to China, any slowdown in China will have a leveraged effect on Australia.

The first effect of an economic slow-down in China will be a fall in base metal prices. Already, there are some signs that base metal prices are cooling off. For example, copper prices are approaching the lows made in January this year. If China crashes, we can expect base metal prices to crash too.

Next, given that the Australian dollar (AUD) is seen as a commodity currency, it will fall. This is to be expected as Australia’s terms of trade and business cycle is closely tied to Chinese demand for commodities, which in turn is tied to the business cycle in the Chinese economy. A crashing Chinese economy will be likely to test the AUD as it was tested in 2008. Mining companies in general will not do well in such an environment. In fact, speculators like Jim Chanos will be shorting the Australian mining stocks (see How is Jim Chanos going to short China? (Australia: take note)).

Then, with the deteriorating terms of trade (due to falling Chinese demand), the Australian economy will slow down. With that, there will be speculations (and hope) that the Reserve Bank of Australia (RBA) will be cutting interest rates.

If China’s coming slowdown is just a soft-landing, then the story may end here. But if it’s a hard-landing, then there will be more complications. In that case, Australia is very likely to have a hard landing too. This is where we are getting nervous. The critical thing to watch out for is Australia’s unemployment rate. As we wrote in RBA committing logical errors regarding Australian household finance,

Given Australia?s high household debt (see Aussie household debt not as bad as it seems?), prime debt can easily turn sub-prime when unemployment rises. As unemployment rises, it will eventually reach a critical mass of prime debts turning sub-prime.

Given that Australia’s highly leveraged banking system is heavily concentrated on mortgages (Black Swans lurking around Australia?s banking system), there will be a tipping point in the unemployment rate that will trigger a banking crisis. That in turn may trigger a currency crisis (see Will there be an AUD currency crisis?).

How to buy and invest in physical gold and silver bullion
If there is an AUD currency crisis, the RBA will be in a quandary. Should it cut interest rates further to support the domestic economy (and condemns the AUD)? Or should it raise interest rates to defend the AUD (and condemn the domestic economy)? This was what Iceland faced in 2008- high inflation, collapsing currency and rising unemployment. The Icelandic central bank had to raise interest rates to defend its currency. Remember, a collapsing AUD implies that the price of oil imports in AUD will sky-rocket (limited to the extent that oil prices are falling due to reduced Chinese demand). As you can read in Five potential emergencies- energy crisis, this will be extremely disruptive to the Australian economy.

Of course, the scenario that we painted is extreme. But after having read and understood Nassim Nicholas Taleb’s The Black Swan, we learnt not to say “never.” Hopefully, the outcome will not be that bad. But for those who want to be prepared, we highly recommend How to buy and invest in physical gold and silver bullion.

Bad luck for investors- confluence of two headwinds

Thursday, May 6th, 2010

For those of you who are active traders/investors, you can surely sense that the feel of fear is coming back to the financial markets. The more prominent narrative for this fear is Greece (plus Portugal, plus Spain). It was just less a month ago that the financial markets were shrugging off the possibility of a Greek default (see Is the Greek debt crisis over?). Back then, investors were ?satisfied? with just a ?40-45 billion ?bailout? package. Now, according to the narrative of the media, even a ?100+ package is not enough to ?satisfy? investors. Not only that, the contagion is now spreading to Portugal and even Spain. So, does it mean that in less than a month, the financial markets suddenly see the light that Greece cannot pay its debts?

That goes to show that the financial market is very often illogical and irrational. When you look at the big picture, it should be clear that this is a deep-rooted problem that cannot be solved with a meeting. As we wrote in All quiet on the Greek front?,

But make no mistake, this story is like a trench warfare that will play out over a period of years (see Currency crisis: first countries in the line of fire- PIIGS). It will engulf more than Greece- vulnerable  countries include Portugal, Italy, Ireland and Spain.

The financial markets, being irrational as it is, will alternate between fear and optimism. We wouldn?t be surprised if this current bout of fear turn back to optimism after another high-level meeting/announcement will appear to ?solve? the problem. Then perhaps some time later, another bout of panic will return. In a way, this is like ?trench warfare? in which neither side is able to gain ground permanently, as they grind each other down. In the same way, the forces of deflation and inflation will battle each other, as money printing (which is the only way out of this crisis) will grind down the value of paper money (euro).

For Australia, there is another headwind- the coming slowdown of China. Marc Faber even go as far as saying that China is likely to crash in 9 to 12 months. Since the global economy is already battling the crisis in Europe, a crash in China will be another serious blow.

This is just bad luck for those who are holding long positions! So, what if China crash? Keep in tune!