china

Chinese buying review can't see the forest or the trees…

March 25, 2014 by Jon

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The government’s obviously been reading my blog and has launched a review into foreign property buying. But it looks like they’ve missed the point, leaving us all in the dark.

Well that escalated quickly.

I’ve been writing about the impact of Chinese buying for a while now. And in the middle of last month I predicted that it was going to become a hot-button topic.
(See: Scandal Set to Explode).

Less than four weeks later, the media frenzy is in full swing and the government has announced an inquiry.

I don’t have a lot of faith in inquiries to produce anything of worth, but the government saw that this was a brushfire that was about to get out of control, and they needed to do something.

The one hope I have that the review delivers some better data than what we’ve currently got. Not because I think that data would show us anything radical and scary. Exactly the opposite.

Good data is the antidote to wild conjecture and rumour.

But it’s not clear to me from the inquiry’s terms of reference (TOR) that that is what we’re going to get.

Let’s break it down to get a better idea of what we can expect.

The TOR opens strongly:

The overarching principle of Australia’s foreign investment policy, as it applies to residential property, is that the investment should increase Australia’s housing stock. The policy seeks to channel foreign investment in the housing sector into activity that directly increases the supply of new housing (such as new developments of house and land, home units and townhouses) and brings benefits to the local building industry and its suppliers.

Bravo. As I’ve written elsewhere, Australia just doesn’t build enough houses. Build rates have been falling every year for the past decade. This is probably the primary driver of house prices over the long run.

In that sense, anything that helps bring new supply to the market should be welcomed with open arms. If it takes Chinese buyers to make it happen, then I’ve got no problem with it.

The TOR then goes on to frame what it thinks is the problem:

Consistent with this principle, foreign investors are able to seek approval to purchase new dwellings and vacant land for residential development. Foreign investors cannot generally buy established dwellings as investment properties or homes; however, temporary residents can apply to purchase one established dwelling to use as their residence while in Australia.

And this is the sticking point. No one really seems to care about Chinese buyers buying apartments in Melbourne’s CBD off the plan. It’s when they’re buying existing houses in leafy suburbs of Sydney that everyone goes crazy.

What’s the difference? Really? Is it because we don’t mind them buying places we don’t want to live in ourselves… but when they start competing with us or our children for the places we love… and out bidding us – then it’s a problem. Is that it?

The only problem I have with it is that we’re missing an opportunity to channel this money into increasing the housing stock and building nation’s wealth.

And there are anecdotal reports emerging about temporary residents or foreign nationals side-stepping the system. Like this snippet from the Sydney Morning Herald:

Buyer’s agent Shane Clinton of Buying Houses Australia says overseas buyers often side-step requirements that they only buy new property by purchasing established dwellings in the name of already established family members.

The significant investor visa has taken a while to get traction, it’s building now, but it means that to date 99 per cent of my clients have been buying outside the recommended visa guidelines…

In Mosman, where more than 30 per cent of prestige sales last year were to buyers from China, McGrath agent Michael Coombs said of the eight sales he made to Chinese buyers in the past six months, three were to visa holders and five were purchased in the names of a family member.”

99 percent of clients buying outside the visa guidelines? There’s an awkward stat.

We reportedly sold 5,091 existing homes to foreigners in 2012-13 (valued at $5.42 billion), but if these anecdotal reports are true, this could be a massive under-estimation!

And with so much uncertainty flying around, it’s fodder for anyone who wants make provocative and sensationalist claims.

And so this is where the TOR lays out what the questions the committee wants to ask.

Notwithstanding these settings, concerns are raised periodically in relation to the possible impact of foreign investment on the Australian housing market.

In this context, the Committee is asked to examine;

the economic benefits of foreign investment in residential property;
whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers;
how Australia’s foreign investment framework compares with international experience; and
whether the administration of Australia’s foreign investment policy relating to residential property can be enhanced.

But can you see the gaping hole here? The committee is just going to run into the same brick wall that I’ve run into when trying to get a handle on what impact Chinese buying is having – there’s not enough data, and the data we do have is opaque and difficult to make sense of.

It’s impossible to find your way in the dark.

So data needs to be central to the inquiry. I guess they’ll figure that out at some point…

But a review of the rules themselves (and whether the rules are actually being enforced!) is very welcome.

We’ve got to take the guessing and conjecture out of this topic. As I’ve said before “foreigners buying our homes” and “our kids can’t afford to buy a house” are both hot-button topics.

Combine the two together and you’ve got a very volatile mix.

A healthy dose of data should chill everybody out I reckon. Even if there’s a problem, we’ll then be able to know how to deal with it.

Are you listening Canberra?

The Two 'Big Bulls' in the Current Property Boom…

March 20, 2014 by Jon

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SMSFs are playing a ‘slow and steady’ race. Despite all the hype, they’re still relatively small players in residential property. But they have the potential to be huge, and totally reshape the market.

The two big stories in Aussie property right now are Chinese buyers and Self Managed Super Funds (SMSFs).

It’s headline news because both a relatively new phenomena. 10 years ago they were barely blips on the property radar.

But with all the hoo-ha in the papers it’s easy to overstate how important they are to the current cycle. The impression you get is that the only people buying houses in Sydney are the Chinese. The only investors making plays at the moment are SMSFs.

But the truth of it is, that right now, both players are still relatively small fish in the property pond.

And the stories about hordes of Chinese buyers cruising the streets of Sydney distract us from what’s actually going on – and that’s a broad-based cyclical recovery in property. You don’t get double digit growth in a market as big as Sydney just because one buyer segment goes on heat.

What we’re seeing in property right now is in a way, exactly what you’d expect. We had a number of soft years, while thanks to massive global money flows coming out of the US, Japan and Europe, interest rates fell to record lows.

It’s a perfect recipe for a bounce in prices.

And the cyclical recovery (predictable, bland and unnews-worthy as it is) is the real story here.

I think this is what Tony Cahill, general manager of wealth management at Bank of Queensland (BoQ), was getting at during the week. He was keen to make the point that SMSFs aren’t to blame for the surge in prices we’ve seen over the past year.

In fact, SMSFs have typically been more drawn to commercial rather than residential property.

He said:

Many DIY fund trustees are small business owners and current rules allow them to invest in a property where their businesses operate.

Yields – or investment income – from commercial properties are also usually higher than those netted from residential assets.

…residential property has [actually] declined as a proportion of SMSF assets in the three years to June…

SMSF borrowing to invest in property contributed to only a fractional 3 per cent of system growth in residential lending.

SMSFs are still small fish in the property pond.

And this is exactly the point I’d make.

The real impact of SMSFs (and Chinese buyers) isn’t going to show up in short-term cyclical dynamics. What we’re talking about are long-run game changers.

It’s not their current appetite, but the potential demand that they could end up bringing to the table over the next decade or so that’s the real story.

Because while SMSFs aren’t big property buyers now, they are sitting on a mountain of cash. At last count, they were worth $507 billion.

That’s bigger than Westpac.

And at the moment, residential property only accounts for around 3.5 percent of the total portfolio.

As I said, that’s not massive. That’s about $18 billion. Still a sizeable player, but nothing over the top.

… yet.

Because I’ve seen surveys that suggest that SMSFs would actually like to have much larger exposures to property – like something in the order of 30 percent.

Now we’re talking serious cheese. If SMSFs followed through on that promise, they’d be throwing another $160 billion towards property. Drop a rock in the pond that big and you’re going to have some serious waves.

But wait, there’s more! Under current rules, SMSFs could leverage that $160 billion towards something around $350 billion and some steak knives.

This is serious coin.

So it suggests that current SMSFs spending of $18 billion could well become $350 billion in a matter of years. How quickly? Well that’s anybody’s guess.

To get a sense of what kind of impact that could have, remember that average house in Australia are worth around half a mil.

So we’re potentially looking at demand for an extra 700,000 houses.

How big is that? Well, remember that we only build about 70,000 homes a year at the moment. So we’re potentially looking at a sudden surge in demand that’s equivalent to about 10 years worth of current supply!

Or imagine that SMSFs gradually roll out the desired increase in property exposure over a full decade. That will still see them potentially buying every new house on the market, every year, for the next ten years!

This is the potential SMSFs have to be a total game-changer.

They’re not there yet, and there’s no point blaming them for the rocket under prices in Sydney. It’s got almost nothing to do with them.

But what we’re looking at is a long run level-shift in Australian property prices. In economics they distinguish between cyclical ups and downs, and structural ‘level’ shifts.

And so in ten years, we’ll still have a property cycle. The property market will still be hotter some years than others. But the surge in SMSF demand will have created a level shift in prices. And in the process, they’ll prop up the cycle. Down years won’t be as down. Up years will be spectacular.

All we’ve got to do is get in on this side of the level shift. And as the data shows, that’s where we’re at. SMSFs don’t have the exposure they’re looking for yet. But they’re on the way.

And if the Chinese buyers reach their potential too… well, we’re looking at a very crowded pond indeed.

HOT NEWS: Chinese Buying 18% of Sydney Property… Seriously!

March 18, 2014 by Jon

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A leading investment bank is tipping that Chinese demand for Aussie property will double by 2020. It’s already one of the key drivers of the market, fuelling exceptional price growth in some areas, but how do we make sure it’s a win-win for everyone?

Note: After I wrote this I found out there are actually plans for a government review into the facts and figures of foreign buying. It’s just murmurs at this stage. Watch this space…

Investment giant Credit Suisse has had a go at estimating the scale of Chinese demand for Aussie property. If you’re looking for evidence of price pressure it’s pure porn, and here’s the money shot:

We forecast Chinese buying power will increase as the economy develops and the population becomes wealthier. They purchased $24bn of Australian housing over the past seven years; we forecast they will purchase $44bn over the next seven, to 2020.

Yep. You heard right. Chinese demand is going to double.

It’s already one of the hottest talking points – the BBQ stopper – in Aussie property. It’s already one of the key driving forces behind the property come back (though it’s important to remember it’s not the only one!). And Chinese buyers are already becoming the scapegoat and whipping boy for first-home buyers cruelly priced out of the market.

But you ain’t seen nothing yet.

As I’ve noted a few times, part of the problem is there’s a real lack of quality data on this issue, which together with sub-tones of racism and fanfare journalism is a dangerous cocktail.

So Credit Suisse have done their best to pull all the threads together. But as they say, there’s a bit of guesswork involved – and their figures probably underestimate things.

Australian Bureau of Statistics! This is your Lone Ranger moment.

But cutting it all together, they estimate that the Chinese are currently purchasing more than $5bn of Australian residential property a year.

To put that in perspective, that’s 12% of new housing supply (we don’t have data on existing supply!). That’s some serious influence. Almost one in eight new homes are being sold to the Chinese!

As we know (or as the anecdotes and hear-say being passed off as facts in the media have told us) Chinese buying is concentrated in Sydney and Melbourne. The Chinese account for 18% of new supply in Sydney and 14% in Melbourne (check out the chart).

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It’s bigger than I expected in NSW (18% – almost one in 5 is huge!), but it’s less than I thought in Queensland. Queensland’s on par with SA… around 7%. Does that sound right? It’s kind of surprising, given we’ve heard a lot in recent times about the natural affinity the Chinese have with Queensland.

I suspect it’s got to be understating things somewhat – though remember this doesn’t include established housing so that might be part of the story.

Credit Suisse then try put a number on future demand. They estimate that there are currently 1.1 million Chinese that could easily afford to buy an apartment in Sydney. They expect this number to increase by 30% by 2020.

With the Chinese growing wealthier and wealthier, and as the routes to Aussie property (Chinese language websites, special concierge services) become more and more established, this opens the way for Chinese demand to double in the next 7 years.

And CS expect we will sell another $44bn of property to the Chinese by 2020.

It’s enough to give you the impression that China is the biggest story in Aussie property right now. And maybe it is.

But that means that China will be the fall-guy to anything that’s wrong with Aussie property – from affordability to housing density and urban sprawl.

And you might remember a few weeks ago I was writing about the Significant Investor Visa – visas granted to foreigners as long as they promised to park their money here.

Recent figures showed that 65 SIVs were granted in 2013 – 59 of which were to Chinese citizens.

That’s over 90%, and it starts to look a little strange. Are the Chinese the only people who want to take advantage of that visa arrangement? Or are we actively pushing for Chinese citizens in particular?

And without an answer to that question, it’s easy to make that case that government policy is actively targeting the Chinese and “selling out our youth to the rich Chinese” as I heard one commentator put it.

The fungus of intolerance and hatred grows in the dark corners of ignorance and insufficient data.

(You can quote me on that.)

But there is an important opportunity here. As I’ve written a few times, Australia continues to struggle with bringing enough new housing supply to the market.

If the surging Chinese demand can be channelled into new supply (rather than existing dwellings), this can only be a positive.

And if we can demonstrate this clearly (and a fact like “18% of new dwellings in Sydney are thanks to the Chinese” is taking us in the right direction) then we can make the case that the Chinese investment is helping to ease the demand supply imbalance and might actually make housing more affordable.

But to do this properly, we need better data. We need a clearer picture of what’s going on.

Because without it, the real danger is the spectre of “foreigners buying all our homes” becomes an election issue and we get some poorly thought out, poorly informed knee-jerk policy response that shuts the whole show down.

We’ve seen it before. We’ll see it again.

Cash for Visa property scandal set to explode!

February 20, 2014 by Jon

Immigration Australia

Rich foreigners are buying their way into the country and stealing our homes.” It’s only a matter of time before this becomes a catch-cry on talk back radio. For the sake of the market, and the country, we need to get on top of this.

I keep a close eye on Canada. Politically and economically, we tend to move pretty close together.

That’s why it was interesting last week when Canada scrapped it’s controversial Immigrant Investor Program. The scheme is basically just a way for rich people to buy permanent residency.

Trouble was, they under-estimated how rich the developing world, particularly China, was getting, and how fast.

As I’ve said before, China is creating 25 billionaires a month!

In that context, the paltry sum required for a Canadian Visa was barely loose change.

To qualify for the IIP, all you had to do was “loan” the Canadian government $800,000 interest free. At the end of 5 years, they gave it back.

What billionaire would even blink?

And so there was a phenomenal surge in visa applications. Embassies stopped taking applications once they had something like 50,000 in the backlog. Last week, they scrapped it altogether.

The scheme had been copping a lot of flack. It was pretty unpopular.

But I wonder if many Australians know we’re running pretty much exactly the same scheme here, though the terms are a little less generous – but not by much.

To buy an Aussie Visa, you need to be bringing $5m into the country with you. But it doesn’t seem like there are clear guidelines about where that money needs to go. In fact, like Canada, a lot of it goes into government bonds.

The New South Wales government mandates that applicants who want to come to NSW must allocate at least $1.5 million to buy Waratah Bonds.

So let me get this straight. In order to buy your way into the country, you’re “forced” to invest a good chunk of wealth in some of the safest and highest paying bonds in the world?

And I thought our governments, with their gold-plated credit ratings, had no problem securing cheap finance from the markets. Do they really need to be propping up demand like this?

And is it worth selling residency for?

And why we are we attracting business leaders with significant assets, only to force them to buy the most riskless and brainless assets on the market?

It’s madness.

I think the basic idea of an investor program is a good one. If you want to come to the country, start up a business, employ some locals, help Australia compete in a global economy, all power to you.

I’ll personally be rolling out the welcome mat.

If the program was about attracting talented business people then I’d be all for it. If you ask me, entrepreneurs – and from all parts of the world – have made Australia what it is.

But the problem is that the program uses wealth as a proxy for entrepreneurship and business nous. That’s just not always the case. Particularly if the biggest determinant of wealth in your country of origin is your ability to milk party political contacts.

And it sticks in the throat a bit. We’re very serious about border control. Unless your rich. Then you can do what you want.

It’s a recipe for the kind of resentment that brought down Canada’s program.

The government needs to get this straight. The fear I have is that immigrants, especially the long-suffering Chinese, will end up being scapegoats for problems that have nothing to do with them.

The latest data show that the new government has ramped up investor visa approvals. 73 visas were approved in the last two months of last year, compared with 15 approvals through the life of the Labor government.

Australia is open for business, apparently.

And my fear is that housing is going to be a flashpoint in this conflict.

We already know, especially if you’ve been reading my blog, that Chinese buying is having a huge effect on the market.

Foreign buyers are already making up a fair chunk of new and existing home sales. Something like between 10 and 15 percent. This chart here comes from NAB.

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But these are national figures. It’s quite likely that in markets like Sydney and Brisbane, the shares are much larger.

And they don’t need to be much larger before they’re eclipsing first home buyers.

This sets up a dangerous tension.

Juwai.com estimates that 63 million Chinese are now wealthy enough to buy overseas. They say Australian buying has increased 9-fold in the past three years.

More and more companies are marketing real estate directly to China. I was on realestate.com.au last night scouting out a few properties and this banner came up:

And we know all this Chinese buying is having a big impact on prices. The danger this creates is that we’re setting up the situation where our first-home buyers are seemingly in competition with the Chinese.

Now, theoretically, you can’t buy here permanently unless you’re a permanent resident, but there doesn’t seem to be anybody policing that. And the Foreign Investment Review Board has been keeping very quiet on what’s actually going on.

A Fairfax journalist put in three separate freedom of information requests. All he got back were four pages covered in white-out.

So you can hear the loony fringe now can’t you?

“The Chinese are stealing our homes!”

We need to get on top of this.

Even if that means putting a bit of a break on foreign buying for the time being. Australian property has its own head of steam. The market is moving into cyclical strength. We can afford it.

Because if we don’t get on top of it – and even just getting some actual stats on what’s going on would be a start – then I worry it’s just going to going to create a climate for much more reactionary, and potentially racist, policy responses in the future.

And for the market, and the country, that’d be a real tragedy.

Interest rates up or down? Here’s what I think…

November 19, 2013 by Jon

I saw a recent survey that said 83% of economists now think that the next interest rate move is likely to be up. That’s almost a dead-ringer for it going the other way.

Here’s what I think…

But first, before we get to that… Let’s look at two big issues that are giving the RBA headaches.

Let’s start with a chart that shows just how much the game has changed in Australia over the past 20 years.

This is the share of export trade going to our three biggest trading partners – the US, Japan and China.

It’s a stark reminder of just how important China has become. The share of exports to Japan and the US have been in steady decline over the past twenty years. China on the other hand has gone bang.

China’s share has gone from less than 5 percent at the turn of the millennium, to just shy of 35 percent this year. Over one third of our exports are now going to China!

This is an incredibly rapid ascendancy into an amazingly dominant position. We have become hugely reliant on the fortunes of China, and just how much of our stuff they can buy.

To a large degree this is a resources story. If you look at the breakdown of Aussie exports, there’s been a similar surge in the resources share of exports, again kicking off around the turn of the millennium.

But while resources have dominated the China story, we’re also exporting rural (=food) and services to Chinese buyers.

And this is why everyone is watching China so closely these days. China does have a big impact on how things are flowing here.

What’s interesting about the explosion in exports to China is that it’s come at a time when the Aussie dollar has remained persistently and stubbornly high. And it’s remained a thorn in the side of policy makers – especially poor ol Glenn at the RBA.

Because the high dollar – and pretty much everyone agrees it’s too high – is real headache for those Aussie businesses that have to compete with companies overseas.

When the Aussie dollar is strong, it’s not just the price of our exports goes up and foreigners don’t want to buy as much. It’s also that the price of competing imports goes down.

So if you’re an Aussie manufacturer – making cars for example – a higher AUD makes your overseas competitors’ cars cheaper.

And so you’ve either got to cut your price as well (decreasing profitability) or find ways to cut costs, or both.

But the AUD’s been high for a long time now. The low-hanging fruit of efficiency gains have been picked. And so it’s tough times for Aussie companies.

This chart here sums it up.

It compares inflation (the annual change in prices) of tradeable and non-tradeable goods and services in Australia. Tradeable goods are those goods where an import from overseas would do just as well – like cars. Non-tradeables are those things were you can’t import them from overseas – like haircuts.

What it shows is that inflation in non-tradeables has been pretty consistent – hovering around 4 percent over the past three years.

Prices of tradeable goods and services however have been falling since the beginning of 2012. Inflation has been negative from that time on, and is only now just starting to push back towards positive territory.

It’s likely that the high AUD has a lot to do with this.

But what that means is that if you’re a company producing tradeable goods and services, then you’ve had to cope with a climate of falling prices. You’ve either had to cut your own prices as well, or risk being priced out of the market.

This, of course, would eat into your profit margins and make for very lean times.

And so the high AUD is making for tougher economic times. If it’s hurting company profits, then it’s also taking a swipe at employment, which in turn means consumer confidence and retail sales.

And so everyone would like to see the dollar move lower.

But it won’t.

It’s currently stuck in a band a few cents either side of US 95c, and has been for months. And the fortunes of the dollar are largely being dictated by what’s going on overseas, and there’s very little anyone here at home can do about it.

And for the time being, the headwinds coming off the high AUD are keeping downward pressure on rates. If the AUD is slowing us down, then interest rates need to be speeding things up.

(We could be asking fiscal policy to chip in here as well, but the Abbott government went to the election with a cost-cutting agenda, so they’re on the side-lines for now.)

Glenn Stevens would like to avoid cutting rates if he can. With official rates already down to 2.5 percent, and a lot of nations already pushed to the zero-bound, he’ll be doing everything he can to avoid a similar fate.

Once rates go to zero, your options really narrow down. And you end up with crazy experiments like Quantitative Easing.

And so it would be a dream come true if the AUD fell another 10 to 15 percent. It would make Glenn’s job a whole lot easier. And it would be a big shot in the arm for the Aussie economy.

But the AUD just won’t move.

Glenn’s even got into the ‘jawboning’ game. At the beginning of the month he threw up his hands and took the unprecedented step of trying to talk the Aussie down.

He said: “these levels of the exchange rate are not supported by Australia's relative levels of costs and productivity. Moreover, the terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower.”

It might not sound like such tough-talking to us, but for central bankers and markets, these were fighting words.

And it worked… for a bit. Glenn’s statement knocked more than a cent of the Aussie dollar that day.

But the effect was only temporary, and was unwound when another central banker – this time in Europe – said that Europe could be on the way to quantitative easing too, and the AUD jumped again.

And the net effect is that this month, the AUD has held fairly steady.

Stevens is right. In theory the dollar should be lower. And everyone would like it to be lower. But it doesn’t matter. It’s what happening overseas – particularly in the US that’s driving the dollar’s fortunes.

And this means, that for the time being, the RBA’s easing bias remains in effect.

China farts and Australia craps its daks!

February 13, 2013 by Jon

Hey, you and me need to discuss this. Your wealth and your children’s wealth depends on it whether we like or not.

Have you seen the movie, Looper?

It’s a movie about time travel 50 years from now. One of the main characters travels back from the future to tell his younger self to learn Chinese, it’s the language of the future.

Whilst I reckon it would be handy, I’m not doing it. But I am watching closely as to what is going on in the Far East (or North from our perspective), so lets move on…

Remember this…. ‘America sneezes and Australia catches a cold’?

Now it’s more like, ‘China farts and Australia craps its daks!’

That’s exactly what happened last year. It looked for a while like China’s growth might fall below 7 percent. That’s not a bad rate of growth. But if you’re trying to pull a billion people out of poverty within a generation, it’s not enough.

And it’s not enough to support China’s monstrous demand for commodities. The World Bank estimates that China currently consumes 45 percent of all metals produced globally.

So if one country is consuming almost half of the global metals market, even the slightest tremor is going to send shockwaves across the world.

And with the resources sector almost single-handedly propping up the Australian economy, it caused a bit of panic here. “The boom is over! The sky is falling!”

The RBA cut rates twice in quick succession, just to cover our assets.

In the end, China got back on track, and all the data so far this year are helping mining executives across the country sleep a little better.

So what happened?

Basically, China was trying to pull off an incredibly tricky acrobatic rebalancing act. They just didn’t quite nail the landing.

During the GFC, China cuts rates aggressively to try and insulate itself from the fall-out. In concert with sustained government spending, the rate cuts worked, and the Chinese economy crashed through the worst of it.

Trouble was, interest rates got stuck on a high-speed setting. And with interest rates at bargain basement levels, money started gushing towards the property sector. The Chinese leadership started to worry about an emerging blossoming bubble in real estate.

(Sound familiar? This is just what some people are worrying is happening right here right now in Australia. )

And so Beijing started looking for ways to take some heat out of the economy – to rebalance growth away from the property bubbles, exports and infrastructure investment, and towards private investment and consumption. Their strategy was to let the economy cool down a little. To bring growth back down to around 7 percent, from decade averages of over 8 percent.

The Chinese leadership went out and let it be known that they’d be happy with these more “balanced” rates of growth. In the words of Vice-Premier Li Keqiang:

“It is hard to maintain double-digit growth, but 7 percent will be enough to achieve an affluent society by 2020. We have benefited from reform in the past 30 years… We have to march on as there is no way back.”

The Chinese government still cut interest rates and banks’ reserve requirement ratio twice last year. But given what was playing out on the international stage, this was seen as conservative.

However, in the third quarter of last year, a string of soft data releases gave rise to the fear that China had undershot the mark, and was running dangerously close to stalling.

Hit the panic button.

But China was never going to let it happen.

Can you imagine how hard it must be administering a nation of 1.3 billion people? It makes what’s goes on in Canberra look like the squabbles of an outer-suburban council.

And can you imagine what an angry mob of 1.3 billion looks like. It’s a scary thought. There’s some very strong incentives to make sure the climb out of poverty continues. And quickly too.

But China has one big thing going for it – it’s stage of development.

China is around where Japan and Taiwan found themselves about 50 years ago. There’s has been an incredibly rapid pace of urbanisation over the past 20 years in China, but still 53 percent of the Chinese population live in rural areas.

And there are estimates that moving every 200 million farmers to urban areas boosts GDP by 0.8 percentage points. That gives the Chinese a powerful lever to lean on.

Similarly with investment. In a transition economy like China’s, it is easy to find productive areas to invest in – areas that expand productive capacity in the long run.

And so China knows that if it needs government spending to give GDP a boost, it can also fall back on infrastructure investment. And it can trust that, (9 times out of 10!) it’s not building some massive white elephant.

In this way, China’s stage of development affords Chinese officials with degrees of freedom not available to more advanced economies.

And you can be sure that the incoming Chinese leadership team will be doing everything it can to keep the party going.

In November 2012, the CCP completed a sweeping transfer of power with the new General Secretary, Xi Jinping and the new Prime Minister, Li Keqiang coming to the helm. While this transfer is not technically official until the annual session in March 2013 of China’s parliament, for all intents and purposes, this new leadership is in place.

And they will be keen to stamp their mark, and show the Chinese people that the economy is in good hands. Some forecasters are predicting that fixed-asset investments in infrastructure, including roads, bridges and housing, could surge to 20 percent this year, from 16 percent in 2012.

China will need to follow the classic development model at some point – moving away from a reliance on investment and exports, to a greater contribution from domestic consumption. But in the mean time, over the next ten years at least, China can rely on massive investment to drive things along.

A recent Fitch Ratings report shows investment (both public and private) reached a new record of 45.6 percent of GDP in 2011. No country in history has known anything like it – not even Japan, Taiwan or South Korea.

This obviously has very bullish implications for Australia and the Australian resources sector.

There will be ebbs and flows in demand for commodities, but there will be a fundamental level of unshakable demand.

The bottom line…

With the world awash with money thanks to the central banks and the China phenomenon, this year is a great year to build wealth and accumulate assets like crazy.

Well, that’s what I’m doing right now…

What about you?