Bernard's Top 10 at 10: ; Chinese cash pumping up Sydney bubble; Charlene Chu and foreign borrowing; America's anaemic middle class; If Google was a guy; Dilbert

Here's my Top 10 items from around the Internet over the last week or so at 10 am. 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 watch today is #10 because it made me laugh out loud several times. The news coming out of Australia's hot property markets is startling too.

1. Chinese money flooding into Sydney - The drums are beating loudly across the Tasman about the flood of money coming out of China and into Sydney's property market, inflating prices.

Australia bans non-residents from buying existing houses, but non-residents are allowed to buy houses and apartments off the plan, or if they've just been built. And there's plenty of residents with good connections to money from China who are buying existing homes too.

China's money supply has quadrupled in the last six years as state-owned banks and shadow banks there ramped up lending even faster than economic growth. See the chart below. China's money supply is now about 60% bigger than America's, even though China's economy is about 60% of the size of America's. The money is desparate to get out of China in some way and get parked in real asset.

China is awash in cheap money.

Now it's trying to find a home in assets that can't be, ahem, taken back by the Chinese Government.

Families all around the Asia Pacific and Europe are buying property as fast as they can. 

Sydney is near the top of the hit parade. Auckland is lower.

Here's the FT with coverage of an A$100 million mansion sale in Sydney.

“Foreign buyers, particularly in China, are buying into Sydney as a secure long-term investment,” says Howard Tanner, a prominent architect who worked with the Fairfax family, the media company founders who own the property, on proposals for renovating it.

Indeed, the near-legendary Chinese and other foreign buyers are credited with fuelling property hotspots across the globe, from London to the Algarve to Miami Beach.

And in Australia too, foreign buyers, together with cheap money and supply constraints, have helped push up house prices, prompting some commentators to warn of an emerging housing bubble in some of the country’s bigger cities.

2. Charlene Chu and China's debt - Former Fitch analyst Charlene Chu has become a rockstar of the economics and debt analysis world with her tireless and fearless analysis of the credit growth going on in China and the risks now apparent there.

She is now watching closely a rapid expansion in foreign currency borrowing by Chinese banks and others inside China. Remember, the main defence of the China bulls until now is that the debt is China is purely internal and therefore no problem. Maybe not for much longer.

Here's more from her in this excellent Telegraph piece:

“Without a doubt, that has been on the rise [foreign currency borrowing] and was really starting to grow fast in the latter half of last year and it’s only going to continue. For the time being, it is only a fraction compared to the massive size of the financial sector, but still we’re talking about a growing amount of funding coming from offshore sources,” she said.

“You look at the exposure numbers from the BIS and the Hong Kong banks . .. you’re going to encounter a few [foreign] institutions that are going to have a sizeable exposure to China.”

George Magnus, senior independent economist at UBS, said the Chinese banking system resembled that of Japan during the 1980s in the years leading up to the country’s financial crash.

“If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you,” said Mr Magnus. 

3. Show us the land - Further to the article above about Chinese money flooding into Sydney, here's Florence Chong from Business Spectator on the frenzied bidding going on these days for land and buildings in Australia.

Forget about off-the-plan apartments. What cashed-up overseas Chinese buyers really want is a house in Australia, and more precisely, the land on which the house sits.

For the right house in the right suburb, they are outbidding Australian buyers by $100,000 to $200,000 – and sometimes more – to secure the property. They are importing inflation to their country of choice.

"Many people say, erroneously, that Chinese investors are only buying new-built – I can say categorically that that is not true," says Andrew Taylor, co-founder of juwai.com, a property website visited by 1.5 million potential Chinese investors each month.

"To most Chinese buyers, re-sales (existing properties) are far more appealing," says Taylor.

Taylor estimates that Chinese investors spent $5.3 billion buying Australian residential real estate in 2013 – but this is a mere drop compared to the estimated $38 billion to $50 billion they spent buying houses overseas last year.

"The bulk of our enquiries are for established homes, priced at $600,000 to $1.1 million in Australia – the sort of price range most Australians are also targeting."

4. Beyond the Shadow Banks - Reuters has a useful piece here on China's surprisingly large loan shark sector, which is where the truly desperate go after they've exhausted their credit lines with the shadow banks and the real banks.

At 8 percent of China's $9.4 trillion economy, according to IMF estimates, it is a surprisingly large niche.

As China intensifies its efforts to discipline risky lenders and calm exuberant credit growth, financial stress is building in the country and underground debt is becoming one of the biggest banking risks.

Analysts say the underground market is most vulnerable to worrying spikes in unpaid loans, especially since its borrowers are often small-time exporters hardest hit when the economystutters.

"You may see a high frequency of defaults," said Qiang Liao, an analyst at Standard & Poor's in Beijing. "The borrowers are more vulnerable to an adverse economic environment."

The risk is that a major default of an underground loan could trigger a domino effect threatening the wider financial system.

5. TPP in trouble - This hasn't gotten much coverage here, but late last week Democratic Senator Harry Reid essentially killed off Barack Obama's (and John Key's) hopes of getting a Trans Pacific Partnership trade deal done anytime this year. 

Edward Luce at FT.com has the story.

If Mr Reid does not want TPA to pass, it will go nowhere. That would badly undermine Mr Obama’s most important two global initiatives that do not involve the Middle East.

In particular, the Trans-Pacific Partnership is the cornerstone of Mr Obama’s rebalancing to Asia. Although China is not part of TPP, the US aims to set up a new set of trade, investment and intellectual property protections that will bind its future behaviour. If Mr Obama cannot persuade his own party in Congress to support the talks, then China’s neighbours will take their cue. They are already riddled with doubts about Washington’s readiness to take on its own vested interests – textiles and sugar among them.

6. America's eroding middle class - The New York Times has an excellent piece here on one of America's biggest problems. The strong and income-rich middle class that powered its growth through the 50s, 60s and 70s has withered in the last two decades for all sorts of reasons, including the gutting of high paid manufacturing jobs by globalisation and new technology, and the rising share of income going to capital in the form of profit.

This is a problem for these same profitable companies because the middle class was the main buyer of their products. Up until 2008 the middle class just borrowed to keep spending at their previous rate. That has ended.

So what now? Companies are focusing their marketing efforts on the top 20% in the hope the trickle down will be enough.

Here's the New York Times:

If there is any doubt, the speed at which companies are adapting to the new consumer landscape serves as very convincing evidence. Within top consulting firms and among Wall Street analysts, the shift is being described with a frankness more often associated with left-wing academics than business experts.

“Those consumers who have capital like real estate and stocks and are in the top 20 percent are feeling pretty good,” said John G. Maxwell, head of the global retail and consumer practice at PricewaterhouseCoopers.

In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.

This factoid is startling.

The current recovery has been driven almost entirely by the upper crust, according to Mr. Fazzari and Mr. Cynamon. Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.

7. What the Sydney Morning Herald says is going on - Here's more on the property boom developing in Sydney.

Public servant Tina Ford said she could hardly believe it when her three-bedroom Chatswood apartment sold this month for $1 million at an auction in which all 16 registered bidders were ethnic Chinese.

“I’m over the moon, I’m gobsmacked,” said Ford, 53, adding that she “would have been ecstatic with $940,000” and didn’t expect to double what she had paid 14 years ago for her third-floor unit with a balcony 11km from Sydney’s CBD. “I suspect that overseas investment, Chinese or otherwise, is certainly pushing prices up, but from a vendor’s perspective, I’m ecstatic.”

Such buying by locally resident Chinese and those from mainland China is inflating housing bubbles in and around Sydney, where prices in some suburbs have surged as much as 27 per cent in the past year. That’s almost three times faster than the overall market.

Many of the neighbourhoods with the biggest price gains “are areas that are popular with Chinese buyers,” said Andrew Wilson, senior economist at real estate data firm Australian Property Monitors. “Some of these suburbs are seeing price growth that we haven’t seen in Sydney since the early 2000s.”

8. So just how powerful and competent is China's military? - The Diplomat says not very, but that makes it more dangerous.

It is precisely China’s military weakness that makes it so dangerous. Take the PLA’s lack of combat experience, for example. A few minor border scraps aside, the PLA hasn’t seen real combat since the Korean War. This appears to be a major factor leading it to act so brazenly in the East and South China Seas. Indeed, China’s navy now appears to be itching for a fight anywhere it can find one.

Experienced combat veterans almost never act this way. Indeed, history shows that military commanders that have gone to war are significantly less hawkish than their inexperienced counterparts. Lacking the somber wisdom that comes from combat experience, today’s PLA is all hawk and no dove.

9. The birth lottery - There's been a lot of talk and research into income inequality in America in recent years, but now there's some research out on inter-generational mobility.

How easy (or hard) is it for someone who is born poor to become rich? Harvard Professor Carl Sunstein writes at Bloomberg that the research shows mobility has been stable for about 50 years with around 8-9% of those born into the bottom fifth being able to rise up through the ranks to the top fifth.

He explains why rising inequality combined with static mobility is a bad thing.

Chetty, Saez, and their co-authors also emphasize that over the last four decades, the U.S. has seen a significant increase in income inequality as well. This increase has important implications for intergenerational mobility.

As the rungs of the economic ladder move further apart, a stable level of mobility becomes a more serious problem, because it matters a lot more whether your parents are rich or poor. The “birth lottery,” as the authors call it, ends up having bigger consequences.

It’s one thing if children have an 8 percent chance to get into the top 20 percent, when the top 20 percent isn’t so far ahead of the rest of the pack. It’s quite different if children have that same 8 percent chance, but the top 20 percent is way ahead of the rest. In the latter case, a child’s ultimate prospects depend far more on the wealth of his or her parents. To put it another way, it is much worse for a child to have only a small chance to escape the bottom if the bottom is very low and the top is very high.

10. What if Google was a guy? - You will laugh. HT Karan.