Thursday's Top 10 with NZ Mint: The bursting of Australia's iron ore bubble; Australia's bad case of Dutch Disease; Another NZ petroleum boom?; Why China's new stimulus plan is failing; Dilbert

Here's my Top 10 links from around the Internet at 2.30 pm today in association with NZ Mint.

As always, we welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read today is #7 about why China's new stimulus plan is failing so far.

1. Australia's iron ore bubble - The Guardian's Larry Elliott writes China's economic slowdown has left commodity-rich Australia and its over-valued currency exposed.

Yesterday's Solid Energy job losses were a faint echo of the same thing.

Activity in Australia is slowing and its over-valued exchange rate is hammering the domestic sector.

New Zealand was cushioned from the worst of the Global Financial Crisis by China's surge of investment spending in late 2008 and early 2009.

The 4 trillion yuan (US$600 billion) splurge on railways, apartments, roads, airports and more apartments lifted demand and prices for concrete and steel, which require enormous amounts of coal and iron ore.

But last year China clamped down on a boom in the Chinese apartment building sector and local government financing vehicles stopped borrowing because the previous investment wasn't paying off. China's leaders were very worried about exploding house prices and a rise in inflation so they moved to slow the economy.

The trouble was the brakes worked so well and were pushed just as Europe and the United States were slowing down that China's growth rate slumped from over 10% to something closer to 6%. Now China is putting its foot back on the accelerator but can't get any traction. See #7 below.

Now Australia and New Zealand are left more naked as the tide of economic growth goes out in the Northern Hemisphere. And we're doubly hit because our currency is obscenely high, largely because we have higher interest rates than the rest of the world and they are printing money hand over fist to try to restart their economies by boosting their export sectors.

Elliott thinks the Aussie dollar fall fall in line with commodity prices. I'm not so sure, given all that printed money in Europe and the United States is looking for a home where interest rates are higher than 0%.

Here's Elliott with the possible Australian fallout:

China's economy is now slowing, and although the economic data is not particularly reliable, it seems to be slowing fast. The country has two million unsold homes, with another 30 million under construction. There is a glut of iron ore and the price is falling. Where does that leave Australia? Horribly exposed, quite obviously.

It has an over-valued currency, an over-valued property market, and its major customer is now desperately pulling every available policy lever in the hope of avoiding a hard landing. Whatever happens, the Australian dollar is a sell. Just how big a sell will depend on how successful Beijing is in reflating the Chinese economy.

2. The cynicism of it all - Reuters reports Citigroup has paid US$590 million to make a shareholder lawsuit over toxic mortgage bonds go away. When is a banker ever going to personally pay for cooking up a dodgy bond and taking the bonuses?

Citigroup Inc agreed to pay $590 million to settle a shareholder lawsuit accusing it of hiding tens of billions of dollars of toxic mortgage assets, one of the largest settlements stemming from the global financial crisis.

The agreement resolves claims that shareholders ended up with massive losses after the bank failed to take timely writedowns on collateralized debt obligations, many backed by subprime mortgages, and engaged in self-dealing transactions that hid the risks.

Citigroup denied wrongdoing in agreeing to settle. It called the accord "a significant step toward resolving our exposure to claims arising from the period of the financial crisis," and said the $590 million is covered by existing reserves.

No worries then...

3. Iron ore price collapse - FTAlphaville reports on the slump in iron ore prices in recent weeks below the US$100/tonne mark.

This is hammering Australia and will likely cause a A$12 billion hit to Australia's budget.

It's all about slumping output and rising stockpiles at China's steel mills. That, in turn, is because construction and exporting has slumped.

It's always, always about China. Yet that word was never mentioned once in all the coverage about Solid Energy's job losses yesterday...

Here's the quote from Morgan Stanley analyst Brendan Fitzpatrick:

“Chinese steel mills have to complete finished product and raw material de-stocking to stabilise both steel and raw material prices and a stimulus driven demand recovery has to take hold to trigger a restocking cycle.”

4. But I thought the floor was at US$120/tonne - Here's MacroInvestor's David Llewellyn Smith writing at SMH.com.au about the shock now rippling through Australia after a 30% fall in iron ore prices in a matter of months.

In the land of commodity research, various research houses are scrambling to catch up to the reality of a falling iron ore price. Until this recent price collapse (down 30% in a couple of months to $US95) iron ore prices were widely considered to have a "price floor at $US120".

The price-floor notion was based upon the idea that Chinese iron ore producers have a marginal cost of $US120 and so would close down if the price fell below that level, removing supply and supporting prices.

However, the "price floor" argument had a fatal flaw. It assumed seamless growth of demand in China and what has caught everyone by surprise is that is no longer the case. Indeed, Chinese steel prices are still falling after a year-long correction.

5. Euro-zone crisis building to a head - The ECB's leadership is now hunkered down trying to formulate a massive bond buying plan to discuss (and agree?) on September 6.

Here's the FT.com on the debate going on behind the scenes and how many at the ECB even cancelled their annual trip to the Jackson Hole shindig in Wyoming.

17 central banks have to agree to it...

Within the ECB’s Eurotower headquarters, three committees of officials from each of the 17 national central banks that make up the eurozone have spent most of August debating the details of the new programme. Last week, they presented summaries of their at times heated debates to the executive board. These displayed a vast range of views over how the programme should work, according to two people familiar with the discussions, leaving the executive board with the tricky task of drawing up a draft plan for the programme that takes into account those differences of opinion.

The board’s plan will be presented over the weekend or early next week to the heads of the national central banks that sit on the governing council before their policy meeting, which begins on Wednesday afternoon. The most likely scenario is that almost all those 23 central bankers will be able to agree on the plan by September 6. But there is an increasing degree of doubt as to whether a sufficiently strong consensus will form on some of the operational details.

6. Australia's bad case of Dutch Disease - The SMH reports on a report out titled 'Australia:The Unlucky Country', which makes the case for a downturn in Australia.

AUSTRALIA faces a run on its currency, a deeper collapse in housing prices and a bank funding crisis to rival Europe's as it tries to come to grips with life after the mining boom, according to a report from a boutique US advisory firm. Entitled Australia: The Unlucky Country, the report from Variant Perception argues that Australia faces a classic case of Dutch Disease, the erosion of capability that flows from a resources boom and an overvalued exchange rate.

"The mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real estate sector," says the report, which has been circulated among global money managers.

The Australian dollar is overvalued on most metrics, one being the hamburger-based Big Mac Index, which has the Aussie 15 per cent to 20 per cent above par, Variant says. But it will need to fall well below par and stay there for some time for the rest of the economy to come to the fore after mining retreats.

And this line is a cracker:

"A total funding need from external sources of 40 per cent is extraordinarily high,'' the report says. "This increases the risk yet further should Australia face a funding shock, driven either by events at home (a severely slowing economy), or abroad (e.g., a euro-driven credit event). Australia's net external debt levels resemble those seen in the European periphery. Its net international investment position is deeply negative, worse than that of countries such as Turkey and Brazil."

Variant says the Reserve Bank will come to come to the rescue of the big four Australian banks in a crisis because they are too important to fail.

7. Crunch time in China - Caixin reports in some detail on why the various edicts from the central government in China are being ignored by many of the local governments.

I was listening to Greymouth Mayor Tony Kokshoorn on RadioNZ this morning saying Solid Energy expected coal prices to rebound early next year as the Chinese economy recovered after all these edicts from Beijing filtered through the system in the same way they did in 2008.

That doesn't seem to be happening at the moment.

Here's Caixin:

Central government orders to ramp up gross domestic product are clashing with fiscal realities as revenue growth decelerates for provincial, city, prefecture and county governments across the country.

Moreover, the slowdown in tax, fee and land-sale receipts is unnerving local government officials whose ambitious plans for social welfare programs and infrastructure projects are now in jeopardy.

In hopes of encouraging local economies and meeting GDP targets set every year in China through central planning, provinces such as Guangdong and cities such Tianjin since January have poured hundreds of billions and even trillions of yuan into projects designed to "secure stabilized growth," as officials often say.

But in many cases the new project expenditures overshot collections, sometimes by wide margins, rattling local officials who had been confident a year ago that 2012 revenues would rise in tandem with public spending sprees.

8. More leadership instability in China - Reuters' Chris Buckley reports on how China's Communist Party is considering downsizing its elite decision making committee or cabinet and downgrading the importance of the domestic security tsar. That may not go down so well with the domestic security types.

Reducing the party's Politburo Standing Committee, the inner council at the apex of power, from nine to seven members would come as part of a once-in-a-decade leadership change expected in the next few weeks or months. China's domestic security chief, Zhou Yongkang, faces defeat if his successor does not follow his example, and that of recent predecessors, and win a place at the top table.

Before he was tainted in a succession of scandals that hurt the Communist Party this year, Zhou expanded his role into one of the most powerful, and controversial, fiefdoms in the one-party government. He has been on the Politburo Standing Committee since 2007 while also heading the central Political and Legal Affairs Committee, a sprawling body that oversees law-and-order policy.

9. Oil boom? - MOBIE today estimates New Zealand could grow exports by NZ$1.5 billion a year and create 5,500 jobs if it could develop another petroleum basin. There's no mention of the Dutch Disease.

“With direct and indirect effects, national GDP could increase on average by $2.1 billion for each year of a 30-year development of a new basin. Looking at the impact of field development scenarios, it’s estimated that a single field could generate between $557 million and $3.2 billion in regional GDP over the life of the development."

10. Totally Jon Stewart and his team reporting on the Republican National Convention.