Bernard's Top 10: China's concrete explosion; NZ's China risks; The problem with maximising shareholder value; Colin Craig and Kiss; The lucky and profligate country; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz. 

See all previous Top 10s here.

My must read is #7 from Martin Wolf on the global macro-economic problems from running corporations to maximise shareholder value.

1. China's major risk - The FT's Jamil Anderlini has written a compelling piece on the state of China's property market and risks it might collapse.

Anderlini, a New Zealander, comes up with startling facts.

These ones stood out for me:

China's debt to GDP ratio rose by 70% of GDP in the six years to 2014.

China produced more cement in the two years of 2011 and 2012 than was produced in all of the United States in all of the 20th century.

Land prices have quintupled in China since 2008.

There is enough floor space being built this year to supply four years of demand.

China's modern residential property market (where households take out a mortgage to buy an apartment) is barely 15 years old but has never slumped.

Here's Anderlini:

“China’s real estate market seems to have reached a turning point,” said Zhu Haibin, a JPMorgan economist, in a recent report. “A housing market slowdown is the major near-term macro risk in China.”

The turning point seems to have come because China has simply built too much.

2. New Zealand's major risk - Is China. That's why we need to keep on eye on China's construction and housing markets. We've already seen this reflected in 40% slump in New Zealand log prices as the builders in China slowed their demand for our logs, which they use to box up concrete and for framing.

There also seems to have been a slowing in growth of demand for our dairy products, although most don't think it will rebound in the longer term.

Here's Standard and Poor's warning yesterday in keeping New Zealand's credit rating at AA stable that China is our main risk.

While we anticipate favorable economic performance over coming years, there are risks to New Zealand's growth outlook and credit quality. These stem largely from the country's strong and growing links with China's economy. If demand for New Zealand's key exports were to weaken sharply, the country's economic growth would slow, unemployment rise, and property values fall.

3. China struggling to fly again - Here's the WSJ citing a Fed paper explaining why China will probably need to crank up its stimulus again to hit its 7.5% growth target after the stimulus announced earlier in the year proved remarkably fleeting.

Surprise, surprise, but it's all about housing...

A sputtering housing market threatens China’s economic outlook and would probably force the central bank and local governments to intervene if they want to hit the country’s 7.5% economic growth target for this year, according to research from theFederal Reserve Bank of Kansas City.

The latest figures “indicate the expansion of the real-estate sector has slowed significantly,” write economist Jun Nie and research associate Guangye Cao. “Taking both the short- and long-term factors into account, the real estate sector’s recent slowdown is likely to continue as housing activity stabilizes at a lower growth path.”

The authors say housing and construction have played an overwhelming role in China’s supercharged growth rates, which have elevated it to the second-largest economy in the world. Real-estate investment grew at an average annual rate of 20.2% since the country’s 1998 housing reform, about twice the rate of gross domestic product expansion, Messrs. Nie and Cao write.

4. Saying it out loud - Here's an FT editorial saying China's tottering property market is the one of the greatest threats to the global economy. And there's plenty to compare with, including the problems with Russia, Europe's mess and the Middle Eastern debacle.

Not only do the construction and real estate industries account for a full 13 per cent of Chinese gross domestic product, they also form the backbone of the country’s fixed asset investment, the lodestar for commodity-exporting economies the world over. News of sagging real estate market activity is, therefore, a concern in its own right. More troubling, though, is that faith in Beijing’s ability to prevent a slump from descending into a crash is starting to unravel.

The newsflow is bleak. Official statistics for July showed 64 of 70 cities surveyed experiencing falling home prices, the biggest monthly proportion of declines since records began in 2005. Developers are pulling back from new investments, and floor space sold in July tumbled 16.3 per cent year on year, down sharply from June.

5. Oops - The story of the New Zealand economy over the last 30 years has been very high net migration and an ageing population. The major deficit has been infrastructure investment, in part at least because our planners have assumed a much lower population.

Kirdan Lees and John Stephenson have written an excellent paper at the NZIER highlighting just how wrong our planners were. The implications of that wrong-ness were enormous. Could we make the same mistake again? Are we still under-investing in infrastructure? It certainly looks like it for housing and all the stuff around it.

6. The lucky and profligate country - It turns out Australians simply spent the windfalls from its mining boom on lots of cars, fridges and other stuff.

Here's Matt Wade looking at a recent Reserve Bank of Australia analysis of where the money went. I wonder how New Zealand has spent its 'windfall' export returns from the now-ending dairy and log booms.

"We find that the mining boom has substantially increased Australian living standards," said the Reserve Bank research discussion paper, titled The Effect of the Mining Boom on the Australian Economy, written by economists Peter Downes, Kevin Anslow and Peter Tulip.

But we didn't just spend the boom windfall on cars and household gadgets. It drove a 20 per cent lift in food purchases and an 8 per cent boost in purchases of communications services, such as internet and telephone use, the paper says. The splurge on new cars meant we also spend more on running them – the Reserve Bank estimates purchases related to "operating of motor vehicles", mostly petrol, was about 5 per cent higher than it would have been without the boom.

 

7. The problem with maximising shareholder value - Martin Wolf has written a brilliant commentary at the FT on one of the fundamental flaws of our modern globalised capitalistic economy -- the drive to maximise shareholder value.

Almost nothing in economics is more important than thinking through how companies should be managed and for what ends. Unfortunately, we have made a mess of this. That mess has a name: it is “shareholder value maximisation”. Operating companies in line with this belief not only leads to misbehaviour but may also militate against their true social aim, which is to generate greater prosperity.

8. Why America is struggling to bounce back - The hollowing out of middle class jobs and net worth over the last decade or two is a major problem for the world's largest economy, Vox explains.

While people in the top 40 percent lost a fair-sized chunk of assets in the downturn, they are currently above where they were in 2000. Meanwhile, the median household in the middle quintile is still worse off than they were then. In the second quintile, the median household only has half the wealth it did in 2000. And the bottom quintile's median household is far deeper in debt.

9. And it's not just America - Middle income jobs have been hollowed out all around the world, as this chart below shows.

10. Totally John Oliver on the wage gap between women and men in America.