Month: February 2010

2010 will be a difficult year simply because we had a complex recession with misleading and deceptive behaviour from many institutional and market related sources. Political correctness, self-interest, and convenient informal conspiracies have combined over the past decade to induce complacency and to mute criticism of behaviours that were near to fraudulent at worst and criminally careless at best, in relation to this credit crisis and the last tech/ telco crash. These institutions include bankers and brokers, government ministers, long-term fund managers, hedge funds, companies, the accounting profession, ASIC, the ASX, the IMF, and central bankers. Thus the natural tendency of market participants and informed commentators towards scepticism has been in retreat, and, to varying degrees, we have been slapped in the wallet by yet another harsh dose of reality. The commentariat has polarised into rampant bulls on one side of the debate, and negative zealots on the other. The response of the thoughtful should be to develop a strategy around viable data, consonant with an effective review and monitoring process. Only the nimble can outperform the swirling mass of ‘noise’ that hits us on a daily basis.

ECINYA 2010 Outlook, published 12/1/2010.

This is not a normal cyclical recession; this is a structural economic crisis. The United States is not a viable economy in its present form. Capitalism is being corrupted by government debt and paper money.

Richard Duncan, author of "The Corruption of Capitalism" on CNBC TV 23/2/2010.

America today has elements of all of the discredited ‘isms’ of yesterday hidden behind the facade of a supposedly free-enterprise economy and democratic system, though only about 26% of the population vote for any administration in office, and even less if the gerrymander is analysed in greater detail. The ‘isms’ are fascism, capitalism, social welfarism, big government conservatism, legalism, religious dogmatism, and powerful cronyism amidst pervasive elitism. The American elite has created national and international kaffirs, and within America itself second class citizens not encouraged to vote, who are as below the rule of law as the elite is above it. Success has bred excess: America has come to believe that its profligate behaviour in relation to energy consumption, poor wages in many areas of its economy, unfunded pension liabilities, a second class education system for many of its residents, the same in health; corporate welfare, tax shelters for those who can afford them, an excess of legal mantra over common sense and good sense, rampant debt creation largely involving other people’s savings, excessive speculation via derivatives and other exotic financial instruments, poor public and private accounting, has led to a country often seemingly out of control and exposed to regular crises, few of which are anticipated and after the event the response is shambolic.

ECINYA 2006 Outlook, published 13/1/2006.

The New York Times reported that one contract in 2001 involved Greece selling forward future lottery receipts and airport landing fees, for cash to write down debts. Josef Proll, the Austrian Finance Minister, said: "All the suspicions there are, suspicions of faked accounting…. must be cleared up. We’ll have to investigate."

The Times (London)16/2/2010

 

The 2010 YEAR AFTER JUST 8 WEEKS

We are comfortable with the Australian market, but less comfortable with overseas markets in Europe and America, particularly the latter. The latest reason given for market fragility is "the Greek debt crisis". For reasons outlined below we find this a difficult rationale, but the fact that it gets widespread acceptance as a valid reason indicates the fragility and volatility of the economic and market recoveries.

Our strategy is to sell the rallies, take a good proportion of our dividends, move from short-cash to longer cash. In our view not enough is happening in the global economy to convince us that a decisive move to the upside is in prospect. We are focused on stock selection and taking short-term profits to increase cash levels from time to time. Our guess is that markets will move within a range before slipping decisively mid -year and then staging a rally of reasonable significance towards year-end. Event risk is not priced in and we are viewing the Israel-Iran stand-off as potentially explosive.

 

TECHNICALLY

Our market focus in index terms revolves around the SP500 and the All Ordinaries (XAO). The nexus between the two is constant, almost irrefutable, and if there is a change in directional relationship it mostly involves currency. To 22 October 2009 the indices rose 25% over 74 days to 1092 SP500 and 4818 XAO; the retracement that followed lasted 9 days and the indices fell circa 5% to 1046/ 4547; next upwave was 8% over 51 days to 1150/ 4889; next down wave to 15 February 2010, 7% to 1075/ 4570. The current upwave is just 5 days old at +3% to 1108/ 4732.We are watching support around 1100 for the SP500 and anticipating resistance around 1120. In XAO terms we perceive support around 4700 and resistance around 4800. Remember our market is substantially cum dividend.

 

BUT WHAT OF THE PIIGS?

 

The PIIGS are Portugal, Ireland, Italy, Greece, and Spain. Collectively they account for around 35% of European GDP and about 6% of total global GDP. Though the numbers may be a little ‘rubbery’ we have created the Ecinya Triple Misery Index which is the aggregate of the unemployment rate, plus the percentage to GDP of the domestic deficit and the current account deficit. On an unweighted basis all of the PIIGS looks very miserable indeed. However, if we weight them on the basis of their share of global GDP the United States is the stand-out economy of concern. In this regard the quote above from Richard Duncan underscores how important it is that America gets its house in order and addresses some of the obvious imbalances that exist.

We need the American eagle to fly!

TIME IS NEEDED

There is a global recovery underway, but it will take time for confidence to return, for banks to start lending again, for companies to re-construct, for governments to get their balance sheets in order etc etc. The Bush-Blair global legacy is being unwound and residual damage has been done to Gordon Brown in the UK and the Obama focus on healthcare has raised questions about his administration’s interest in matters economic. Brown faces an election this year and Mr Obama has to get through the November mid-terms. Australia also has an election this year and many concerns are being raised about the apparent waste in the Australian stimulus packages.

In looking at economics, the traditional thesis has been to talk of two economies: the real economy and the symbol economy. The real economy is the production of goods and services; the symbol economy is money and credit. We have always believed that the latter existed to facilitate the former. However, with the growth, in particular, of derivatives and a greater global focus on equities and investment generally, the emergence of third economy distortions have complicated the process and the analysis.

What then is this third economy? It is ‘the political economy’, an expression that has emerged over the past few months. The symbol economy and the political economy tails oft wag the real economy dog. Currently, governments are embracing very significant debt loads to prop spending up and unemployment down. Unemployed persons mostly become angry voters.

Debt is said to invoke necessary discipline, simply because you have to pay it back, or risk foreclosure, or a credit downgrade which increases the cost of future debt. Private debt is said to be more disciplined than public debt because it requires you to earn income and profits to service your debt obligations, including interest payments. Public debt on the other hand usually results in governments raising taxes, or more debt, in the hope that inflation over time, or an election loss, will hide their profligate behaviour. The problem with governments, of course, is that they face the electorate on a regular basis which encourages unsustainable pre- election policy followed by the need to pay for it post-election. A lot of the cost of poor policy and poor policy execution is higher interest rates.

Hence the ‘voodoo economics’ of which we speak is that Ecinya remains to be convinced that de-leveraging the private sector by leveraging the public sector is sound economic policy. Australia has gone from a domestic budget surplus of just under 2% of GDP and zero debt to a domestic deficit of 3.6% and 19% govt debt to GDP ratio, respectively. The domestic deficit is a swing of $50 billion. Wow! Though these deficit numbers are relatively low and well short of the USA at 10% and 55% respectively, it still means that we are exposed to any downturn in the global economy and vulnerable to the unexpected, such as event risk and, say, an oil price spike.

 

 

 

2010 will be a difficult year simply because we had a complex recession with misleading and deceptive behaviour from many institutional and market related sources. Political correctness, self-interest, and convenient informal conspiracies have combined over the past decade to induce complacency and to mute criticism of behaviours that were near to fraudulent at worst and criminally careless at best, in relation to this credit crisis and the last tech/ telco crash. These institutions include bankers and brokers, government ministers, long-term fund managers, hedge funds, companies, the accounting profession, ASIC, the ASX, the IMF, and central bankers. Thus the natural tendency of market participants and informed commentators towards scepticism has been in retreat, and, to varying degrees, we have been slapped in the wallet by yet another harsh dose of reality. The commentariat has polarised into rampant bulls on one side of the debate, and negative zealots on the other. The response of the thoughtful should be to develop a strategy around viable data, consonant with an effective review and monitoring process. Only the nimble can outperform the swirling mass of ‘noise’ that hits us on a daily basis.

Because the XAO is 55% above its 2009 lows and only 28% below its 2008 highs, the ‘bargains’ are not in abundance. Therefore –

      Stock selection is vital.

      The earnings season starts end January and many companies have to overcome the dilutive impact of heavily discounted share issues.

      Risk management is essential, look for macro turning points.

      Trade around the edges of value propositions.

      Try to find some takeover or recovery stocks.

      Focus on major resource stocks and fewer speculative stocks.

      Have a small bit of speculative money in established bio-techs and climate related situations.

      Look for industry rationalisation in the media sector.

      Have some dollars in property (oversold) and infrastructure.

      Keep your eye on $USD index (China, USA and India expected to provide 60% of the world growth estimates for 2010).

We expect a few retracements, with the first being in the first quarter, particularly if the S&P 500 heads for around 1150 to 1180. The sooner the correction, the better.

ECINYA Insights ‘2010: Our view of the year ahead’ 12/1/2010

  We are in day 19 of the current downward retracement. The All Ordinaries (XAO) has retraced 6.6% since the high of 4981 on 11/1/10 to Monday’s close of 4570. The S&P 500 (SP500) has declined 6.5% from the January high of 1148 on 14/1/10 to Friday’s close of 1075. It is little surprise that US trading was weak ahead of the public holiday on 15/2/10 (Presidents Day), so we will anticipate the coming day’s trade to see what the post-holiday sentiment will bring. Amidst talk of Greece defaulting on debt, the markets have hesitated, while volatility in the US dollar hasn’t helped clear a definitive path either. As John Mauldin states in his recent paper ‘If PIIGS could fly’: “Greece has in fact been in default in 105 of the last 200 years…[and Greece] stands at 875% debt-to-GDP when including off-balance sheet items!” If Greece were to default, the PIIGS’ debt concerns may not prove detrimental unless the topic of anxiety envelopes the US and Euro zone more generally. A shift in focus towards US debt levels, or increased talk or action taken on the country’s credit rating, would see a definitive move to the downside.  

XAO hit an intra-day low of 4508 on 5/2/10, keeping above that psychologically important 4500 mark. Staying above 4500 on XAO or 1050 on SP500 is crucial, as a dip below would initiate a more significant decline. Following such a move, support levels can be found at around 990 on SP500 and 4200 on XAO.

Despite a current sideways trend, technical analysis could argue that there is further downside to come. There is the possibility of a reversal in the Williams %R and RSI on SP500, and the XAO would follow, like a good puppy. In addition, the moving averages on both indices have crossed over on top of a clear downward sloping wedge. Piigs might fly?

This week we have republished the Insights article of Jan 27 “Early days of the anticipated correction”. As the market volatility increases, investors are uncertain. Or, as is eloquently stated in our strategy section: ‘A wide diversion between the Bulls and the Bears remain; rampant bulls on one side and negative zealots on the other.’ A review of this article, as well as the 2010 overview papers, may provide some perspective.

 

Early days of the anticipated correction

 

Think, Act, Review

Please re-read our most recent Insight Articles ‘2010: Our view of the year ahead’ and ‘Re-visiting last week’s 2010 overview’. Do not expect simple days ahead. Think, Act, Review.

THE CORRECTION HAS STARTED: Let’s look at the technical context first

The S&P 500 (SP500) reached 1148 on 14/1/10 and the All Ordinaries (XAO) reached 4981 on 11/1/10. These levels are 27% below the peaks of 1565 (SP500) and 6853 (XAO) reached on 9/10/07 and 1/11/07 respectively. They are 70% above the low of 676 (SP500) and 60% above the low of 3111 (XAO) reached on 9/3/09 and 6/3/09 respectively.

Give or take a day the primary trend from the lows is 223 days old (as at 27/01/10) and has proceeded as follows:

      First advance 43 days +25.6% XAO, + 37.4% SP500

      First retracement 5 days negative 4.1% XAO, negative 5.1% SP500

      Second advance 20 days, XAO +8.1%, +7.3% SP500

      Second retracement 20 days negative 6.7% XAO, negative 7.1% SP500

      Third advance 74 days +24.2% XAO, +27.1% SP500

      Third retracement 9 days negative 5.6% XAO, negative 4.2% SP500

      Fourth advance 52 days +7.7% XAO, +8.8% SP500

A few observations: If you are an Elliott Wave advocate you would probably ignore the first retracement, but we regard any fall greater than 2% over 2 consecutive days as a potential turning point and we observe momentum on a daily basis. It has been clear for some time that momentum was slow in the period of the fourth advance averaging just 26 basis points daily for the XAO and 38 basis points for the SP500, compared with the third advance when the numbers were 55 basis points daily XAO and 62 basis points daily for the SP500. Also note the harmonic relationship between the SP500 and the XAO. Why is this so? Simple… the USA is China’s largest trading partner and the world’s largest economy. China is our largest trading partner.

Momentum can also be viewed via the charts and we constantly refer to the Williams%R and the Relative Strength Indicator to signify over-bought positions. We use daily, weekly, and monthly measures in this regard.

How long will this correction last and what will be its dimensions? Our guess is that it will be relatively short as this is not the big one that we are expecting in calendar 2010. Looking at the fundamental context, we would put this view on hold if the SP500 moves above 1113, and the XAO moves above 4850. A bigger correction will be data driven, not the cacophony we are currently witnessing. Earnings in earnings-per-share terms is always the most critical data point

CONTEXT, FUNDAMENTAL VIEW

Using our Portfolio Menus, over the past 3 months our Buy/ Accumulate tally has averaged 20 stocks overall, a Buy/ Accumulate ratio of 13%. If the earnings season unfolds satisfactorily we expect this ratio to rise.

This 3-day old retracement is said to have been caused by two factors. Firstly, President Obama announcing that the banks have to now pay for their bail-out in some way- increased taxation, curbs on bonuses, and re-regulation. Secondly, that Ben Bernanke’s endorsement as Fed Chairman is now doubtful. In relation to the banks, their excesses have clearly been massive and these excesses have flowed from Wall Street to Mainstreet where massive unemployment, negative GDP, negative profit growth, and massive domestic deficits have resulted. It has been said of Wall Street :

It can fairly be said that the chain of catastrophic bets made over the past decade by a few hundred bankers may well turn out to be the greatest non-violent crime against humanity in history. They’ve brought the world’s economy to its knees, lost tens of millions of people their jobs and homes, and trashed the retirement plans of a generation, and they could drive an estimated 200 million people worldwide into dire poverty. In other words, never before have so few done so much to so many. And has there been even one major, voluntary resignation by an American financial executive? One sincere apology? One jail sentence? Why the American public hasn’t taken to the streets in revolt is a mystery that can be linked to our inherent belief in the virtues of capitalism.

Graydon Carter Editor Vanity Fair, June 2009 issue. This magazine is an excellent source of economic and political material

And further:

We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let’s face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we’ve already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.

John Hussman, Hussman Funds Management, December 2009. (From ECINYA Insights 8/12/2009.)

The Wall Street banks would not be regarded as ‘banks’ in Australia. The vaporised names – Merrill Lynch, Bear Stearns, Lehman – were speculative trading houses in commodities, derivatives, collatorised debt obligations, hedge funds, and private equity buy-outs. The still-standing major names – Goldman Sachs, CitiBank, UBS, Morgan Stanley – appear to have learned little from the economic chaos of 2008.

In Ohio last week president Obama said; "We want some rules in place so that when you financial guys make bad decisions, we don’t have to foot the bill. That’s pretty straight-forward." Warren Buffett has suggested confiscation of CEO’s assets and their wives’ assets as well. This is pretty serious stuff and transcends debates about capitalism vs socialism, and neo-cons etc. On 12 December Ecinya said: "Political correctness, self-interest, and convenient informal conspiracies have combined over the past decade to induce complacency and to mute criticism of behaviours that were near to fraudulent at worst and criminally careless at best, in relation to this credit crisis and the last tech/ telco crash."

In relation to Ben Bernanke we note that he has received a ringing endorsement from Mr Greenspan. That, of itself, should cause serious questions to be asked and serious reservations to surface. America’s last central banker of substance was Paul Volcker.  Just ask him who should be Chairman of the Fed.

 The financial crisis that engulfed global capital markets and brought a number of important international banks close to the brink last year has been followed by a good deal of soul searching among the regulatory community…Work is proceeding to try to establish better arrangements so as to prevent the next crisis, or, more realistically, at least make it less costly – all the while seeking to avoid doing things that make it harder to recover from this one.

Glenn Stevens, Governor of the RBA, December 2009

 

Treasury and ASIC have cast different visions for the future of financial product regulation in Australia. …it will be interesting to see whose views prevail in the battle between these heavyweight agencies.

Stephen Jaggers, partner, Mallesons Stephen Jaques, October 2009

 

IFSA does not believe that the recent financial service and product provider collapses are evidence that our regulatory regime has fundamentally failed or that the legislative requirements imposed on financial services providers are grossly inadequate…This is not to say that our financial services regulatory regime cannot be improved…We believe there is room for improvement.

Investment and Financial Services Association (IFSA), July 2009

 

As at 30 September 2009, funds management institutions in Australia had over $1.3 trillion of consolidated assets. To put this into perspective, the financial services industry controls a pool of money larger than Australia’s annual GDP. The average Australian has $62,632 invested in various managed funds. Aided by compulsory superannuation, superannuation co-contribution schemes and an increase in the export of financial services, the industry continues to grow.

Presently the funds management industry is subject to regulation primarily through the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC). This includes the enforcement of legislation in the Financial Services Reform Act 2001 which was refined with the Corporations Amendment Regulations in 2005. The reforms introduced in 2005 included a relaxation of what constitutes the provision of a financial service. Providers of financial services were also given the ability to substitute a full Product Disclosure Statement (PDS) for a short-form PDS, provided a full PDS is available on request. However the global financial crisis has triggered a wave of distrust towards the financial services industry which now faces re-regulation.

Whilst the robust Australian regulatory system is generally viewed positively by international investors there are currently numerous reviews underway, including a submission by ASIC to the Parliamentary Joint Committee on Corporations and Financial Services (PJC). Although there has been regulatory changes regarding credit rating agencies and short selling, the government must consider broader reform encompassing greater protection for retail investors. Reform in the industry could also address many of the so-called contributory causes behind the financial crisis, including an inappropriate use of leverage and the provision of inadequate financial advice.

In its submission to the PJC, ASIC suggests several areas for reform such as prudential regulation of a larger range of financial products. This would involve more than conduct and disclosure regulation for products such as debentures or products where there is the potential for hardship to occur should the product fail. It is argued that this would negatively affect market efficiency by creating a lack of higher risk-return investments; however the severe losses incurred to retail investors over the past few years could have been minimised if more complex financial instruments had been subject to greater scrutiny.

Furthermore ASIC suggests restrictions on the type or design of products sold to retail investors in order to ‘safeguard investors from high-risk or unsuitable products’. In a world where CDOs, CMOs, and CLOs run riot it makes sense to protect the average investor, who struggles to understand even the basics of a credit default swap. ASIC suggests that investors are categorised in order to restrict access to riskier financial products. Only qualified retail investors that self-certify annually will receive access to certain securities. Although such a regulation would be beneficial, it could be interpreted as discriminatory and would create red tape that limits market efficiency.

Another area that could face reform is the licensing of financial advisors. An increase in licensing regulations such as the ability to ban individuals deemed improper would further mitigate risks to retail investors. On the other hand an increase in licensing laws could create high barriers to entry that prevent the industry from expanding, especially in terms of export potential.

In an alternative approach Treasury acknowledges that increased regulation in the financial sector seeking to remove risk could create a moral hazard if a sense of complacency were to develop among investors. Additionally an increase in regulation would increase costs resulting in ‘the community underwriting financial risk through the tax system’. Instead of supporting ASIC’s suggestions, including a restriction on remuneration for financial advisors, Treasury believes investors would receive greater benefit from improved disclosure. Therefore although regulatory action may be necessary in response to perceived vagaries in the funds management industry, it is certainly not the case that ASIC’s sweeping reforms must be undertaken.

Nevertheless given the economic instability and volatility caused by the crisis, it is clear that improved disclosure is not sufficient in preventing large-scale financial devastation. Thus in reviewing regulation of the funds management industry the government should not be lulled into a false sense of security by green shoots of recovery. The underlying issues such as the inappropriate use of certain securities are a result of insufficient regulation and the problems remain, hence reform is necessary or we could be witness to take two.

By Nicole Loewensohn and Emily Stewart

“Paranoia will get you through times of no enemies better than enemies will get you through times of no paranoia.”

Pete Granger

 

“In 10 years time, China will have 15 cities each with more people than the entire population of Australia and a further 22 cities with more than 10 million people. This unprecedented urbanisation drive in human history represents a tremendous challenge and opportunity for our resources sector.”

Warwick Smith, Chairman ANZ (NSW/ACT)

 

“No relationship is more important to the future well being of Australia than the relationship with China. It impacts on all Australians.”

Hon. Bob Hawke AC at the Australia-China Investment Forum 24/09/09

 

Once again Australia Day has been and gone and the country enjoyed the day off to play cricket and eat barbequed lamb amongst various other treasured traditions. And we have a lot to enjoy here in Australia, with a solid resources sector, sound monetary policy and a stock market up 46% from the March 2009 lows. Nevertheless our solid growth is unavoidably linked to the new great world power that is China.

As Alan Kohler suggests “bet on China, not America. That means bet on Australia – it is in the right place at the right time”.  The source of Australia’s sustained economic growth is undoubtedly China’s insatiable demand for resources, yet as China seeks to take a more direct involvement in Australian industry, feathers are being ruffled and paranoia sets in. There has always been concern over foreign ownership of Australian-owned businesses, but there could be a serious cost to the economy through the denial of foreign direct investment (FDI).

Australia is a nation with low domestic savings, we are a net capital importer, thus if the economy is to continue to grow it is imperative that FDI is utilised and new sources of funding encouraged. With a ‘US$2 trillion war chest’ China clearly has the capacity to become a significant investor, whilst recent attempts to invest in the Australian resource sector demonstrate clear intent of China to take a larger direct stake in the domestic economy.

In the past, the UK and the US have largely been responsible for FDI flows into Australia, accounting for 24.8% and 24.3% of the 2008 total respectively. Since then the global economy has continued to suffer, and although showing signs of recovery, both the UK and US face considerable troubles, with some suggesting that America is headed for bankruptcy. Therefore new capital markets will need to be explored; and who better than China, our largest trading partner.

Unfortunately due to the fact that Chinese outward FDI is largely considered sovereign investment, it is subject to a rigorous review process by the Australian Foreign Investment Review Board (FIRB). Although FDI rules in Australia have been eased for private investment, most Chinese FDI is still subject to intense scrutiny, which has recently been criticised for causing delays that dissuade investors. Furthermore policy that seeks to limit Chinese investment in Australia could damage an already ‘fractious’ relationship.

Australia must develop a balanced approach to China, protecting Australian interests and encouraging a friendly relationship, yet this is problematic whilst there remains an obvious lack of transparency in both China’s legal and political systems that gives cause for concern. It is suggested that China has ulterior motives in securing significant interests in Australian industries.

This tension has been highlighted by the case of Chinalco’s now failed plan to inject US$19.5 billion into mining giant Rio Tinto, which would have increased the Chinese entity’s stake from 9% to 18%. Whilst the Australian government made a positive ruling on the investment, stating that Chinalco could acquire up to an 11% stake in Rio, the topic became the centre of a heated political debate. Malcolm Turnbull suggested that it would be against national interest for a firm such as Chinalco, owned by a communist regime, to have such a large stake in Australian resources. Conversely John Howard stated that FDI should come “from any source”.

A month after the deal was called off the Chinese government detained four members of Rio Tinto’s sales team, including Australian Stern Hu. Rio was accused of having acquired data that threatened China’s national security, as well as “winning over and buying off, prying out intelligence… and gaining things by deceit” during price negotiations for iron ore. Chinalco has denied a link between these events and the failed investment.

Nearly seven months later the four employees remain under arrest, awaiting the decision as to if and when the case should go to trial. It is expected that the case will be referred to the Central Committee of Political and Legal Affairs, run by the ruling communist party. It is this close relationship between business and politics in China that has Australian firms questioning the acceptance of substantial FDI.

The Australian government showed its fear in early 2009, when the Chinese state-owned China Minmetals attempted to purchase OZ Minerals. The original sale was blocked given the location of the Prominent Hill Mine within a sensitive military area. Nevertheless a deal without the mine was achieved marking a positive step in Sino-Australia investment relations. Similarly the purchase of Australian company Felix Resources by Yanzhou Coal Mining Co marks the biggest buyout by a Chinese firm in Australian history, suggesting that 2010 could begin a new era of mutually beneficial investment.

Therefore whilst a fear of China abusing its power is not to be entirely disregarded we cannot afford to cast China in the role of villain seeking world domination. It is up to the government to establish a solid framework for reviewing both sovereign and private FDI on an equal basis, ensuring no loopholes or bias. The benefits of a sound relationship would flow not only to the resource sector but provide a strong boost to the Australian economy. Kevin may even improve his Mandarin.

By Nicole Loewensohn and Emily Stewart