China has bailed the world out of an extended global recession and has conveniently given the current Federal Government a dream-ride through rough times. The seemingly unstoppable growth in the developing economy of 1.3 billion people continues to drive this country’s resources sector. But what happens if the growth miracle slows or even stalls? Rampant growth never lasts forever but with the benefit of 20/20 hindsight we can generally expect that miracles and dreams always end badly.
Along with every boom story there are the doomsayers. In the case of the Chinese economic boom, a larger number of theorists are appearing on the scene predicting how this is all going to come unstuck. A reasonable amount of coverage has been given to one of the more detailed and well-structured pieces on the symptoms that are apparent in the current Chinese situation and its recent development. I can recommend those readers interested in the depths of this thinking to seek out a paper by an investment analyst Edward Chancellor who works for GMO, a US-based funds manager.
His paper discussing the “red flags” of the Chinese economy was released in March identifying 10 factors that can be linked to impending disaster. Why would we believe an American investment firm could pick a crisis? Chancellor wrote a book in 2005 about the cancer caused by over-use of credit in the US and UK, which creates an “illusory prosperity”. He has some cred therefore.
Amongst these red flags from China are the dazzling growth story; faith in everything that authorities announce; endemic corruption; extended use of fixed currencies; a boom in investment; uncritical investors; and an over-supply of easy money. We are reminded of some amazing numbers and facts about where its growth is coming from, where money is being directed, and how much potential waste and surplus exists. Last year for example, 90% of GPD growth was provided by fixed asset investment in infrastructure. By all reports China - for a developing nation – has great infrastructure in transport and housing which is already seriously under-used. When that demand even slows, the message for commodity metals will be significant. Weakened sentiment will expose banking and resources sectors to more than a mild panic.
The risks are surely understood by its leaders, but for them it’s a dicey balancing act. China has announced, after a near face-off with the US over the distortions created by its artificially low yuan, that its exchange rate will given “more flexibility”, and will be allowed to rise in value against western currencies.
The major difference in this situation with the booms and busts of the past is that China is not a democracy nor does it have hands-off government. The case of the US credit crisis, the Asian economic crisis of the late 90s, and just about every other major bubble situation that has burst were in democracies with reasonably good transparency. By last rankings, China was 79th on the league table of country transparency! China may not only continue to tell porkies about its numbers when growth tops out, but it may also be able to prop up any weakness in its economy by tapping into its massive financial reserves. In any event, would we really ever know the full story?
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