Former Treasury secretary Ken Henry reckons that what's bad for Greece may turn out to be good for Australia. Why? It will make it easier for Australia to finance its current account deficit! Woo hoo!

Capital in flight - and that's what a bank run is, whether it's an individual depositor or a global hedge fund - has to find sanctuary. The easiest (most liquid) place is the US bond market. But Henry likes to think that Australia has developed the reputation as a 'safe haven' for global risk capital. 'The good news side of it is that it is possible, maybe even likely, that any capital flight associated with the euro could make it easier for Australia to finance its current account deficit,' Henry told the ABC last night.

We suspect Henry would like that capital to flow into a new infrastructure bond market. Those bonds would be floated by State governments and finance the infrastructure required for Australia's growing population. We wrote about this new bond market in the most recent issue of Australian Wealth Gameplan. With new exchange traded funds (ETFs) in the fixed income market, it's now possible to fill the 'bond' portion of the Permanent Portfolio with fixed income ETFs.

But back to Henry's point, is Australia a safe haven for capital? Well, we'll see. Obviously we like the place well enough or we wouldn't have been here for seven years. But enjoying the climate and the footy is not the same as deciding to plough your life savings into the share market or the property market.

For a country that managed to run a persistent current account deficit during the greatest ever commodity boom AND managed to stack on about $220 billion in government debt at the same time, the 'safe haven' tag seems misplaced. As we wrote a few weeks ago, the last crisis shows that foreign money flows out of Australia in a crisis, not into it. But maybe this time it will be different.

Maybe what Australia needs is Don Corleone. We bet you didn't know that Australia needs a 'godfather'. As if the disintegration of the euro wasn't enough to wrap your head around, the Chinese have seized on this moment of anxiety to put pressure on Australia geopolitically. A former officer in the People's Liberation Army (PLA) has told Australia that it needs to choose who is going to be its Big Daddy in the Asia-Pacific for the next 100 years.

Song Xiaojun told the Age, 'Australia has to find a godfather sooner or later...Australia always has to depend on somebody else, whether it is to be the 'son' of the US or 'son' of China [It] depends on who is more powerful, and based on the strategic environment.' He inferred that, while Australia has been basking in the glow of record mineral exports to China, it's been lazy about looking after its strategic interests. 'Frankly, it has not done well politically.'

This must be the 'bad cop' part of the interview. It's hard to imagine these kinds of remarks winning you influence and friends in Australia. It's quite possible that Song means 'godfather' in the paternal way, as an older, wiser hand that looks after the interest of a 'son' the way a father might. But he could also mean Don Corleone. Is he making Australia an offer it can't refuse? Hmm.

Assuming this is a two-man job, that means the 'good cop' must be Li Keqiang, the man slated to be China's next Premier. He's meeting in Beijing with new foreign minister Bob Carr. The men are celebrating the 40th anniversary of Australia establishing diplomatic relations with China.

Why would China try to get Australia in line, strategically speaking, right now? Is it because America is weak? Because Australia is vulnerable? Because China is strong? Or because China is weak?

Surprisingly, the last part may be more likely than you think. We don't mean weak in economic terms, although you could make the argument China IS getting weaker. In fact, Li Keqiang made the argument himself to the Financial Times when he cited electricity consumption, rail cargo volumes, and the disbursement of bank loans in the Chinese economy.

Li said these three factors paint a truer picture of China's growth model than do 'man made' GDP figures which are 'for reference only'. Electricity output grew just 0.7% in April, year-over-year. In March, it increased by 7.2%. Rail cargo volumes are growing at half the pace they were this time last year, according to the FT. Banks are extending fewer loans as well.

Let's see...less power used in making goods means fewer rail cars used in transporting them and fewer bank loans taken out purchasing or making them. That all adds up to slower growth. But is it a lot slower? Or is it just a little slower? That's the big question.

And that brings us back to the issue of political strength, not economic strength. The 18th National People's Congress of the Communist Party of China (CPC) will meet later this year. Among other things, the Congress will elect nine new members of the Standing Committee of the Politburo (SCP). This is the most powerful group in China. It's the group that controls Chinese economic and political policy.

In case you've missed it, there's been a power struggle going in the CPC. To make a long story short, we'd suggest it has to do exactly with what kind of 'growth model' keeps the party in power. The 'Chongqing Model' adopted by the ousted Bo Xilai relied heavily on selling land for development and then building massive state-funded housing and infrastructure projects. This investment-led growth has been great for Aussie resources.

But outgoing Premier Wen Jiabao - a CPC rival of Bo's - has called this model 'unbalanced, uncoordinated, and unsustainable.' This is a point Dr Paul Monk elaborated on his presentation at our After America conference in Sydney. There's disagreement within the Party over which growth model delivers sustainable benefits to the people, and thus keeps the Party in power.

What's more, China has a lot less 'policy flexibility' to deliver growth on demand than some analysts imagine. Dr Savvas Savouri, the bloke we quoted yesterday, says, 'On practically every measure, such as bank reserve requirements or interest rates, monetary policy is much tighter in China than in the West.' He reckons all the Chinese have to do is lower interest rates here, adjust reserve requirements there, and voila...growth is back at 8.5% a year.

But that entire model of management is under review in China because it's failing globally. It's also under review because it's fake growth...or growth for the sake of politics. All the signs point to the end of this global growth model. And if Li knows this better than anyone, he may be maximising China's political leverage over Australia while it still lasts. Stay tuned for more on this geopolitical game.

Regards,

Dan Denning
for The Daily Reckoning Australia