Bernard's Top 10: Japan's lost quarter century; China's (very) eventual day of debt reckoning; 'A sham trust from the start'; Australia's negative gearing battle between the old and the young; Clarke and Dawe; John Oliver

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 #5 from George Magnus on Chinese debt.

1. Japan's lost quarter century - Last week's surprise admission of defeat by the Bank of Japan when it decided not to increase its stimulus has got a lot of people rethinking their 'central bank put' assumptions.

Ambrose Evans Pritchard curdles the blood with this piece on Japan's debt-deflationary spiral. As prices keep falling, the real value of the debt gets even bigger, particularly in a per-capita sense as Japan's population falls.

I'm always a bit wary of predictions of doom in Japan. It seems to have functioned pretty well for the last 20 years and remains rich and stable. Sure, the debt gets bigger and the growth won't come, but it's amazing how long you can make debt last with negative interest rates.

It can't be that bad. Their unemployment rate is 3.2% and there are 1.3 jobs for every applicant. Europe would kill for that problem.

But here's Ambrose in good form:

The Japanese economy is contracting again, caught in a debt-deflation vice. Growth has been negative for four of the last eight quarters.  What was once a ‘Lost Decade’ is turning into a “Lost Quarter Century” with no remedy in sight.

“Their options are diminishing. I can’t see any way out of the debt-trap, and it is an acid test for the western world,” said Neil Mellor from BNY Mellon.

Public debt is rising fast on a shrinking economic base, pushing the public  debt ratio to an estimated 250pc of GDP this year. “The debt will never be ‘repaid’ in the normal sense of the word,” said Lord (Adair) Turner from the Institute for New Economic Thinking.

Olivier Blanchard, the former chief economist for the International Monetary Fund, warned recently that country is nearing the end-game as the pool of domestic funding for the bond market starts to dry up and the Japanese treasury is forced to rely on much more costly capital from global investors.

2. 'People don't trust their balance sheets' - Australian­Super’s chief investment officer Mark Delaney is wary of China's economy, and he has an office in Beijing that has looked at investing there and decided against investing for now.

Here's why, as The Australian reported:

“China has been in a downturn for two years. Profit growth has been terrible and asset prices have been very expensive. It hasn’t been a very good cyclical environment to be involved in.”

But he said there was also concern about the credit bubble in China with its growing levels of government debt as well as questions about the bad debt exposure of the country’s banks.

He said Chinese bank shares were only selling at single digit multiples of their returns “not because they don’t make a lot of money, but because people don’t trust their balance sheets”.

“No one really knows how this is going to be sorted out.”

3. Trouble brewing - These details in the Australian's report were the most eye-opening, particularly given the latest round of the usual lending-for-apartments stimulus that has gone on in China in the March quarter:

The International Monetary Fund estimated that China may have as much as $US1.3 trillion ($1.7 trillion) in loans to borrowers who did not have enough income to meet their repayments. It estimated this could mean potential losses of as much as 7 per cent of China’s gross domestic product.

In its latest Global Financial Stability Report, the IMF estimated that loans “potentially at risk” could reach 15.5 per cent of total bank commercial lending — some three times the level reported by the Chinese bank regulator.

4. Squirt and hope - Rowan Callick reports the latest lending surge in China may have to be reversed. And then what?

Rosealea Yao, an analyst with Beijing-based Gavekal Dragonomics, says: “The huge surge in both housing prices and mortgage lending in the first quarter of 2016 certainly looks very frothy and very risky, even if it has helped alleviate short-term worries about growth.”

She asks: “Has China salvaged growth only by inflating a housing bubble?

“How much tolerance the government has for this debt-price spiral is thus a crucial question for judging how long the nascent construction cycle will last.

“Historically, the government has usually intervened to prevent housing prices from rising too fast, as they present a political as well as an economic problem. Therefore it is very likely the authorities will in coming months move to cool down both overall credit growth and excesses in the frothiest housing markets. If they do not, a bigger boom-bust cycle will result.”

5. This can't go on for ever - George Magnus is another one worried about China's latest credit squirt to revive economic growth. He says it can't last forever and he reckons lending is currently growing 25-30% per annum to grow the economy by 6-7%. Hmmm. Those numbers won't add up for long.

The share of total credit in the economy is approaching 260 per cent and, on current trends, could surpass 300 per cent by 2020 — exceptional for a middle-income country with China’s income per head. The debt build-up must sooner or later end — and when it does it will have a significant impact on the global economy.

Back in 2008, as the western financial crisis spread, China tried to insulate itself with a big credit stimulus programme to counter factory closures and an accompanying return of millions of migrants to the countryside. By 2011 the growth rate had peaked. Its decline was led by a fall in investment in property, then manufacturing. Subsequent stimulus measures have not al­tered the trend for long — but one constant is a relentless build-up in the in­debtedness of property companies, state enterprises and local governments.

6. Extending the day of reckoning - Magnus says the eventual moment when someone has to recognise the bad debts could be extended. After a lot of pretending.

For now, China’s credit surge seems to have stabilised the economy after a sharp slowdown around the turn of the year. The property market has picked up, attracting funds from a stock market that has fallen out of favour with investors after pronounced instability in the middle of last year and early in 2016. The volume of property transactions has risen and prices have re­bounded, especially in the biggest cities.

Timing the end of a credit boom is more luck than judgment. There is no question that lenders own bad loans, reckoned unofficially by some banks and credit rating agencies to amount to about 20 per cent of total assets, the equivalent of around 60 per cent of GDP. These will have to be written off or restructured, and the costs allocated to the state, banks, companies or households. Yet in a state-run banking system, where loans can be extended and there are institutional obstacles to realising bad debts, the day of reckoning can be postponed for some time.

7. 'A sham trust from the start' - As reported by Sam Sachdeva, and Anne Gibson a High Court judge criticised John Key's personal lawyer, Ken Whitney, in a 2014 ruling on the creation of a trust for a bankrupted Las Vegas property developer (Rod Nielsen) who wanted to develop a project in Albany north of Auckland:

In the ruling, Justice Wylie concluded: "In my judgment, the Rosebud Trust was a sham trust from the outset.

"The intention from the outset was to mislead, to conceal Mr Nielsen's identity and to enable him to carry on business in this country, notwithstanding his bankruptcy."

The Prime Minister said he had complete faith in his lawyer, who said this in court:

When asked during cross-examination if he had concerns around setting up structures to allow a bankrupt to continue in business, Mr Whitney told the court: "No, not particularly. It's a common thing for people to do. It may not be morally as white as it could be but it's normal practice."

Mr Key has also reassured New Zealanders that New Zealand's trust sector was completely transparent and cooperative with our tax authorities if they or overseas tax authorities wanted information.

Here's what the High Court ruled on Mr Whitney's activities around transparency and cooperation with the authorities:

According to the judgment, Mr Nielsen used the trust to enter as a partner into Auckland's Albany Heights housing development. In negotiations Mr Nielsen wrote to his partners citing advice from Mr Whitney that said Rosebud was set up so he would "not show up on the trust deed". According to Justice Wylie: "Indeed, Whitney accepted in cross-examination that this was done to maintain secrecy as against all parties, including the Official Assignee."

When approached by the Official Assignee, who was probing Mr Nielsen's bankruptcy, Mr Whitney twice failed to respond. Nine months after the initial request, and faced with a threat of summons if he failed to comply voluntarily, Mr Whitney said he had no information.

Justice Wylie, in commenting on the level of disclosure, said: "Whitney did not disclose the existence of the Rosebud Trust to the Official Assignee, notwithstanding the breadth of the initial request in October 2009, the further request in July 2010 and the more pressing demand on 19 August 2010. Nor did he volunteer that [Nielsen and his wife] had been appointed discretionary beneficiaries of that trust."

8. Negative gearing - The debate over negative gearing is heating up over the Tasman because Labor wants to stop it so landlords can no longer offset their rental losses against their personal income. This has been much harder to do here since the abolishment of LAQCs.

Here's Bernard Keane at Crikey on the intergenerational wealth battle at the heart of the issue:

Australia’s tax system, which is heavily skewed in favour of property investors and against those trying to access housing to live in, will remain intact if the Coalition has its way. That will preserve an environment in which — especially in Sydney and Melbourne — younger people and low-income earners are condemned to perpetual renting, so high are house prices in areas of economic opportunity. Turnbull and Co. have, like so many politicians before them, taken the side of home owners and investors against younger Australians looking to buy a house.

This isn’t merely an issue of fairness for younger people and low-income earners. It is economically and socially dislocative; to access jobs and other economic opportunities, young people and low-income earners must work in areas where they can’t afford to buy, meaning they rent forever or spend much of their time trapped in gridlocked infrastructure trying to commute. And services that need low- and middle-income earning employees — healthcare, childcare, aged care — struggle to attract staff because the people they would normally recruit live dozens of kilometres and 90 minutes away by car.

Sound familiar?

9. Totally Clarke and Dawe - An Australian voter fesses up to voting for someone.

10. Totally John Oliver on Puerto Rico's debt crisis - Seriously.

And I hope we don't have too many of these in the nether regions of our comment sections.