Thursday, April 18, 2013

Auditor warns China debt crisis could dwarf GFC

By Business editor Peter Ryan

There are warnings that China could face a financial crisis bigger than the United States or Europe unless it gets its debt under control.

One of China's top auditors has revealed his accounting firm has stopped approving requests from local governments to increase their debt exposures.

Listen to my report from this morning's edition of AM.

Concerns about a potential meltdown come as China's stellar economic growth begins to slow.

It is pretty hard to get an accurate reading on China's total debt levels, much of which is held by local authorities, but estimates are that China's provinces, cities, regions and villages owe a collective $US3 trillion.

All of this stems back to 2008, when the collapse of Lehman Brothers triggered the global financial crisis and China needed to protect its growth and status and, as a result, pumped more than $US500 billion of stimulus into its economy and created a massive credit boom.

Now a senior Chinese auditor who is the head of China's accounting association, Zhang Kew Hoc, has told the Financial Times of London that he has stopped signing off on risky bond sales by local governments.

Michael Pettis, a professor of finance at Peking University, says the ramped up caution shows China's debt party might soon be over.

"The problem is that so much of this investment is going into empty real estate, empty highways, empty airports, unnecessary manufacturing capacity, etc, that we're in the position, and have been for many years, where debt is rising more quickly than the ability to service that debt," he warned.

"So that's the conundrum they face - if you want to bring that problem under control, you have to bring investment down, and if you bring investment down growth rates will slow very, very sharply."

The International Monetary Fund has also been warning about China's debt levels, and investment banks and ratings agencies have been on the front foot after failing to read the initial signs leading up to the GFC.

There is a very big focus on China's real estate sector, which accounts for 13 per cent of the country's GDP.

There has already there has been a sharp decline in values but, unless Chinese authorities intervene to stop a real estate bubble, some economists are quite worried that there could be much more than a correction but a crash that could rival the US one, which of course almost brought down the US economy back in 2008.

Wednesday, April 17, 2013

Europe carbon price plunges to record low; adds heat to Australia's $23tax

By Business editor Peter Ryan and staff

The price of carbon in Europe has plunged after the European Parliament rejected an emergency plan that would have forced companies to pay more for polluting.

European carbon permits fell as much as 45 per cent to as little as 2.63 euros ($3.34) a tonne, and German power prices for next year fell to their lowest level since 2007.

The slump resonates here given that Australia has a fixed carbon price of $23 a tonne until moving to a floating market price linked to the European scheme in 2015.

Listen to my report from the morning's edition of AM.

The unprecedented slump has raised debate about whether emissions trading schemes are the best way to handle climate change or to make carbon polluters pay.

The problem for the EU scheme is that the eurozone debt crisis and slowing economic growth has meant less industrial output - that means less pollution and, as a result, companies have been buying fewer carbon permits and the price has dived from highs of as much as 31 euros a tonne in early 2006.

Today's proposal to reduce the short term supply of carbon permits as a way of pushing up the price came from France, but was rejected 334 to 315 with 63 abstentions by the EU Parliament.

"We now expect waves of speculative selling, followed by industrials also liquidating their surpluses," Konrad Hanschmidt, an analyst at Bloomberg New Energy Finance in London, told Bloomberg News.

"There is still a theoretical chance that the measure may pass, but that is not looking at all likely."

One man who voted in favour of the proposal is Chris Davies, a Liberal Democrat from Britain, who says it is a dark day for the environment.

"This is a blow against all who want to see Europe leading in the fight against climate change, and it also represents us turning our back on our own industrial future because most of the big engineering companies recognise that we need to develop low carbon technologies," he argued.

"In order to do that we have to put a price on carbon, create the right incentive. If there's no price, there's no incentive, we're not going to develop these new technologies. This decision today is really very bad news for our future."