Don't Bank On China

[gram]

Why China is thriving despite the downturn

Ross Gittins
August 15, 2009 - 12:00AM
The Age

IF YOU want a lead on how the world economy is affecting our economy, take my tip: forget the United States and study China.

That's not easy, however, because the Chinese publish much less information about their economy and some of what they do publish isn't reliable.

But it's clear from the Reserve Bank's latest statement on monetary policy that it is putting a lot of effort into monitoring the Chinese economy.

Why is China so important? Well, measured on purchasing power parity, it's the second-biggest economy in the world - more than half the size of the US and about twice the size of Japan, with the third-largest share of world trade after the US and Germany.

More pertinently, China is at the heart of the Asian trading region, and these days ''non-Japan Asia'' accounts for more than half our two-way trade in goods. Add Japan and you're up to two-thirds.

China is now our biggest trading partner in goods, with its share of our exports of goods rising from less than 5 per cent to more than 22 per cent in just the past 20 years.

Its share of our exports of iron ore has gone from 20 per cent to 80 per cent over the same period, while its share of our exports of coking coal has shot from nothing much to almost 30 per cent in the past 12 months.

China's continuing demand for our commodity exports does most (along with a bumper wheat harvest) to explain why, almost alone among the decent-sized economies, our exports have been growing while everyone else's have been collapsing.

Over the nine months to June, the volume of our exports of goods and services grew by roughly 2 per cent, whereas the exports of the US, Britain, Singapore, Canada, Taiwan and Germany fell by 10 per cent or more. Japan's fell by almost 30 per cent.

What's more, the rebound in China's demand for our stuff means that though our terms of trade - the prices we receive for exports relative to the prices we pay for imports - are now expected to deteriorate by about 20 per cent from their peak last year, they'll still be about 45 per cent better than their average over the 20 years to 2000.

But if China's exports to a deeply recessed world economy have collapsed - and their volume fell by more than 20 per cent over the nine months to June - how can its imports from us be holding up so well?

Short answer: because there's more to economic growth (and hence a need for imports) than just the production of exports, especially if you're a rapidly developing country with a population of 1.3 billion.

Longer answer: this is what all those smarties who thought a collapse in China's exports proved the folly of the belief that China's economy could be ''decoupled'' from the developed world got wrong.

Most growth in most economies comes from ''domestic demand'', not from ''net external demand'' (exports minus imports). Domestic demand consists of consumer spending, home building and business investment, plus government consumption and investment spending.

To put it another way, most of the trade that occurs in an economy is trade between people within that economy, not with foreigners. An economy that engaged in no external trade could still grow.

I was always a believer in the decoupled argument because I believed that should a world recession rob China of much of its export income, the managers of its economy would lose little time in switching the engine of growth from exports to domestic demand.

And, as the Reserve explains in detail, that's just what they've done. After the financial crisis deepened in September, the Chinese soon announced a major budgetary stimulus package. They also eased monetary conditions, including the easing of various credit controls, directives to banks to substantially increase their lending, the reduction of banks' reserve ratio requirements and a significant lowering in lending interest rates.

The budgetary stimulus involved increased public investment in infrastructure, which has been stronger away from the more developed coastal provinces and reflects efforts to improve transport.

But it's also involved direct efforts to increase household spending, including incentives to purchase housing, cars and other durable goods, especially in rural areas. Investment in fixed assets has increased by more than 30 per cent since November and car production has risen by 75 per cent since December. Cement production is also well up.

Housing activity is strong in response to lessened credit restrictions on developers, lower down-payments and higher interest-rate discounts for first-home buyers, and cuts in taxes on home sales.

Although China's quarterly growth slowed to 0.5 per cent in the three months to December, it returned to 1.5 per cent in the March quarter, then a roaring 4 per cent in the June quarter (that is, growth at an ''annualised rate'' of more than 16 per cent). Over the six months to June, credit grew at an annualised rate of about 45 per cent.

The good thing about all this is that whether the Chinese get their growth from exports or from domestic infrastructure investment, housing and consumer durables, they need lots of steel. Steel production is up 20 per cent since December. And the chief ingredients of steel - iron ore and coking coal - are precisely what we sell them.

If you're pessimistic, you can say the Chinese won't be able to maintain the present rate of budgetary stimulus, so their economy will soon fall back.

But that ignores the longer-lasting effect of the monetary easing and the central government's strong budgetary position - a budget deficit of only about 4 per cent of gross domestic product and public debt level of about 20 per cent - not to mention the likelihood that growth will be self-sustaining to some degree.

And I know this: right now I'd much rather have our economy coupled to China than the US.

[cluster]

Everyone has opinions... and here it seems like is a cluster**** of opinions and when people challenge things they try to rebutt the argument by posting yet another opinion.

Who is going to win this argument? No one, thats who.

Truth is there is an explaination about the whole China thing... why its more resilient than some expected... but the facts rely on knowing exactly how China operates internally. What is the structure of their economy is the question people should be asking themselves. What they should not be pouring over is some obscure quarterly digit that may in truth may itself be false to start with.

I want to hear something on a new topic...how much is China's central govt involved in China's economy? The fact of the matter is, most people have fallen victim to China's state run, state operated propaganda machine... and as a result they vastly under estimate their involvement and hence where all this 'internal demand' is coming from.

Has China grown? Yes, definitely over time. But they have NOT followed a Western business model or style. As for myself I was in China as far back as when you had to register with the cops and had North Korea style minders that followed you around...believe me... I have seen the changes...I have had a front row seat to the whole event.

Long story short, it kind of gets old listening to (or reading about) in the popular media or even here on this site the 'yes it is, no its not' banter. Most of what results is hands down disinformation.   

[cluster]

<i>and as a result they vastly under estimate their involvement and hence where all this 'internal demand' is coming from.</i>

<p>

I meant to say 'a lot' of this internal demand...

Also yet another factor is that of the average Chinese household...most of them have grown up in a turbulent time frame or at least remember it... and it is extremely culturally ingrained to save like hell.

If you don't have the money you ought not buy something is basically it. Plus there is no such thing as any social security systems.... if you don't save enough by the time you are old, too bad for you.

The fact of the matter is, most of that savings money is not up for grabs, at least not in the shorter term. If I asked you to go out and empty all of your retirement accounts and go on a buying spree, you probably wouldnt do so and neither would they.

The buying habits of the average Chinese consumer is a hard thing to nail down...but by and large depending on what the product you are selling is, the vast majority of demand comes from industrial sources.

If you are selling makeup to women, that is one thing. If you are selling an iron ore smelter that is yet another. People don't buy iron ore smelters to put in their back yard....

All in all its much more complicated than one might imagine, but its not impossible to sort out. It starts with being specific about what you are talking about... no generalizations...

Most of China's 'demand' is led by the nose by the investment boom (or bubble depending on how one looks at it)....and whats more, the govt maintains tight controls to try and prevent social instability, economic or otherwise.

The fingers of the central govt are longer than most people care to admit, and China is debatably still not a market economy, at least not by western standards.

 

[Vulcanl]

Cluster,

I think that things are changing in China. 

Specific evidence: Rampaging demand for motor vehicles.

[cluster]

Cluster,

I think that things are changing in China. 

Specific evidence: Rampaging demand for motor vehicles.

I am very familiar with that...within the last several years there has been an effort to change the situation.... that being said, as little as 10 years ago more than 90% of all cars sold in China were sold to govt agencies...such as taxi companies, or even just corporations or whatnot.

While that 90% number is not correct now, the tiger didn't change his stripes overnight...still the vast majority are sold to govt agencies and not to individual consumers.

The argument will arise though about what is 'private owners' though... which again boils back down to the whole propaganda thing...

If a company is 51% owned by the govt in some sort of lay partnership they are labelling that and those kinds of companies as 'private'...

[Buy Now]

I never said China would bounce back so fast but it will.  China's recently announced stimulus package is good news because it will keep China's growth rate up at a pretty healthy rate and so imports will continue to go into China at a fairly good rate.

Think about it, that's good news for countries like Mongolia and Australia that export their commodities like copper and iron ore to China it's also welcome news for countries selling primary products, machinery and parts to China.

Their government budget is expected to report small surpluses in 2009-10 after an approximate surplus of .4% of GDP in 2008.

And while inflation has been a recent issue, much due to rising oil prices, it is expected to decline to about 3.8% in 2009. Utility costs will remain high, but these will be compensated by low consumer goods and food costs.

[Dr. Phil]

I never said China would bounce back so fast but it will.  China's recently announced stimulus package is good news because it will keep China's growth rate up at a pretty healthy rate and so imports will continue to go into China at a fairly good rate.

Think about it, that's good news for countries like Mongolia and Australia that export their commodities like copper and iron ore to China it's also welcome news for countries selling primary products, machinery and parts to China.

Their government budget is expected to report small surpluses in 2009-10 after an approximate surplus of .4% of GDP in 2008.

And while inflation has been a recent issue, much due to rising oil prices, it is expected to decline to about 3.8% in 2009. Utility costs will remain high, but these will be compensated by low consumer goods and food costs.

What rubbish.
The stimulus package is not working because the sensible Chinese will not incur debt to spend simply to stimulate domestic production caused by reduced exports.
This is prudent and sound but for MNCs who want profit its bad news.

China does not buy "imports".
The increase in imports to date are raw materials, bought at historically low prices to stockpile as a hedge. Also its a way of dumping some of Uncle Sam's greenbacks.

The problem with not being able to "give" money away to the people of China is that all of this stimulus cash has found its way into the investment market and has created a bubble.
A big one.
And people are being warned that it is about to burst.