The End of China's Easy Growth
|September 16th, 2012, 08:53 PM||#1 (permalink)|
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The End of China's Easy Growth
Caixin magazine reports - with disbelief - that the wish-list for industrial parks and mega-projects unveiled by all echelons of the Chinese system has reached 15 trillion yuan by some estimates.
This is over $2.3 trillion or nearly four times the blitz of extra spending after the Lehman crisis in 2008, a policy that pushed investment to a world record 49pc of GDP and is now deemed to have been a mistake.
But as Caixin also reports, the authorities are running out of easy money. Land transfer fees for the 300 largest cities have fallen 38pc over the last year.
The central government’s tax revenues have grown 8pc, but spending has risen 37pc. "The good days of overflowing government coffers are over," it said.
Mark Williams from Capital Economics said the fiscal blitz is a mirage. Most of the road and urban rail plans were already in the pipeline. Spending will be spread over years. "We can see no sign of a fresh stimulus. The project approvals are interesting solely because the government chose to publicise them," he said.
China may have to muddle through the downturn after all with less extra juice than hoped. This will be sobering. The country’s cost advantage over America - and others - has vanished.
A new report by PricewaterhouseCoopers entitled "A Homecoming for US Manufacturing" claims it is now cheaper for whole clusters of US industry to produce at home, close to their markets. Firms are "re-shoring" -- to use the vogue term -- to cut transport and inventory costs and take advantage of cheap shale gas. The weaker dollar has iced the cake.
PwC said the US has clawed back a cost advantage of 2pc in steel output against China, at least for the North American market. Its "heat map" gives the US the edge in chemicals, primary metals, electrical products, machinery, paper, transport equipment, and wood, in that order.
This did not stop Republican candidate Mitt Romney accusing China of job "theft" and "currency manipulation" on Sunday. He needs to keep up with the literature. The yuan is no longer undervalued in any meaningful sense. Nomura thinks China will have a current account deficit by 2014.
Google is building its Nexus Q Music and video player in the US. General Electric and Ford are switching to plants at home. So is Caterpillar, which is interesting since its chief Chinese rival Sany Heavy Industry is in trouble. It has just asked creditors to waive a $510m financial covenant.
Boston Consulting Group has been banging on this homecoming drum for some time, arguing that wage inflation of 16pc annually for a decade has eroded China’s lead. The gap in "productivity-adjusted wages" was 22pc of US levels in 2005. It will be 43pc (61pc for the US South) by 2015.
It issued a fresh report last week -- "The End of Easy Growth" -- warning that the profit margin of China’s leading companies has been slipping behind since 2009. It fell to 11pc last year compared to 18pc for global peers.
The group studied 50 fast-growing companies -- among them Sany, as it happens -- concluding that they are at an "historical turning point". Either they make the changes needed to break through in the global big league as Brazil’s Vale, Mexico’s Cemex, or India’s Wipro have all done, or they risk languishing as also-rans.
The World Bank made much the same argument for the country as a whole earlier this year in a joint report with Beijing’s Development Research Centre. It said the export-led growth model launched by Deng Xiaoping over thirty years ago is obsolete. China risks a drift into the "middle income trap" unless it abandons its top-down strategies and grasps the nettle of free-market reform.
"Innovation at the technology frontier is quite different in nature from catching-up technologically. It is not something that can be achieved through government planning," it said.
Premier Wen Jiabao agrees, but there are others at the top of the Communist Party who think the 2008-2009 crisis vindicated tight party control of industry and the banking system. It did no such thing.
You could argue that East-West rebalancing in labour costs is just what the world needs. The question is whether China can tolerate the shock.
I missed the World Economic Forum in Tianjin last week but Jamil Anderlini from the Financial Times reported a pervasive tone of "despondency and cynicism" from Chinese officials and economists, in marked contrast to the bullish certainties -- or naïveté? -- of foreigners at the event.
"I believe China is going to experience a very serious economic downturn and I think it has already started," said one leading economists. "The government is trying now to stabilize the economy but the instruments they have are very limited. If it can’t turn things around then I expect huge and widespread social unrest."
There are degrees of bearishness on China. My own view as a "soft bear" -- based more on anthropology than economics -- is that the country will ultimately pull through and reclaim its rightful place as a global superpower. The dynamism is unstoppable, much like the US in the Roaring Twenties.
But that is the sweep of history. The ups and downs of economic cycles are another matter. The Politburo clearly misjudged the difficulty of deflating a property bubble after letting loans grow by almost 100pc of GDP in five years (IMF data), almost double the rate in Japan over the five years before the Nikkei bubble burst or in US before the sub-prime peak.
Albert Edwards from Societe Generale -- an Ice-Age bear -- thinks China’s downturn has reached an inflexion point. The balance of payments were in deficit in the second quarter. Capital outflows trumped the trade surplus. Foreign reserves fell.
Let us not forget that reserve accumulation -- the side-effect of holding down the yuan to pursue export share -- was the prime cause of China’s credit bubble in the first place.
It automatically forced China to import a US monetary policy that was far too loose for the needs of a fast-growing, over-heating economy, as Alan Greenspan warned at the time. It seemed to work marvellously, but Faustian Pacts come due.
This powerful process is now going into reverse. Lombard Street Research estimates that capital flight has reached $320bn over the last year. Monetary policy is tightening by default.
"It is a massive shift down through the gears for the monetary printing press. And if the capital outflows accelerate, the next gear may yet be reverse," said Mr Edwards.
China’s $3.2 trillion reserves may be large at 22pc of the M2 money supply, but they were even larger -- 35pc -- for the Asian Tigers just before their currencies buckled in 1997. The reserves prove nothing either way. The issue that matters is whether they are enough to overwhelm the actions of China’s own elites, should they continue to squirrel money abroad as fast as they can.
This capital flight appears to be `tail-risk’ insurance by well-informed Chinese, a hedge in case the 10-year power transition in October goes badly wrong or in case the pressures of a secular downturn cause another of China’s sudden political pivots, as in 1898, or at the onset of the Cultural Revolution, or indeed in case a "war" engulfs the Pacific region -- as US Defence Secretary Leon Panetta warned over the weekend.
What is clear is that the deeper effects of the global crisis and the Long Slump have at last caught up with China. The headwinds will be greater from now on. A President Xi Jinping -- if it be he -- will face an entirely different landscape.
The End of China's Easy Growth - Telegraph