China Will Drag Australia Down

Australia's Credit Bubble Is Built On An Even Bigger Chinese Credit Bubble

Lisa Du / Business Insider with Ian Waldie / Getty Images

Concerns of a slowdown in China have caused investors to grow even more cautious about Australia. On a recent trip to Australia, Societe Generale's Dylan Grice was taken aback when he came across a book titled "The Australian Moment" by George Megalogenis which talked about the 'Australian miracle.'
"I had a great time in Oz: fantastic people, wonderful atmosphere, and a truly beautiful country. But I felt more relaxed when Australians called themselves the lucky country with their typical honesty, realism and humility. Now that it's been upgraded to the status of miracle I'm worried."
In a new report titled Popular Delusions, Grice argues why Australians should be worried that someone is calling their country a miracle. He points out that Australia is currently benefiting from a commodity bull market that is inflating a credit bubble, which itself is being inflated by a Chinese credit bubble.
He explains his argument in 7 charts.

There has been true wealth creation but it has been driven by a commodity bull market. The boom bust history of commodity markets argues for caution.

Societe Generale

A large part of the current wealth creation is "illusory and credit-fueled". Debt to disposable income has gone from 40% in the 1990s to 150% today. "A credit bubble built on a commodity market built on an even bigger Chinese credit bubble, Australia looks like leveraged leverage, a CDO squared."

Societe Generale

On a positive note a sudden flood of supply, a classic trigger for a housing crash is absent in Australia. In this respect Australia is more like the UK than Ireland, Spain or the U.S.

Societe Generale

Australia's non-housing investment, and mining investment especially have however surged. But mines are only economically productive at the right commodity price and in the very long term.

Societe Generale

Mine production is being ramped up to meet demand that is assumed to be as high in the future as it has been in the past.

Societe Generale

But this ignores the massive shale gas revolution underway and leaves Australia in a 'precarious position'.

Societe Generale

Australia's biggest commodity exports are iron ore and coal. Signs point to weakening iron ore demand in China with Wuhan Iron & Steel investing $5 billion in pig, fish, and organic vegetable farming.