Via Bill Blain of Mint Partners,
“You can’t convince a deaf man by talking…”
Is China about to become the big “No-See-Um” moment of 2013?
This morning’s news that the China leadership has launched a “mini-stimulus” package might confirm what we’ve long feared – China’s economic situation is more perilous than we thought. It looks like a comparatively modest supply-side package of tax cuts, export boosts and railway stimulus, designed to “arouse the energy of the market” according the State Council. But it could be the first of many new programs according to analysts.
The state is clearly concerned. That it has been forced to act should be a wake up and smell the coffee moment for markets – the implications of China slowdown could be this year’s game changer in markets.
How deep is the real economic problem in China?
As noted previously after the disappointing flash PMI, there has been a run of misses and doubts on recent data and comments. We’ve had some political message worries – a few weeks ago there was a momentary confusion on whether the Government had quietly downgraded growth to 7% from its 7.5% target. We’ve had doubts on data – the inconsistencies between what it claims to export and what Hong Kong actually imports, which we suggested in May might mean GDP is far lower, around 5%! If that is true, then hard hats on.
What is actually happening? Usually anyone daring to question the solidity of the China economic miracle is dismissed as a crank and ill-informed stooge. But, there are plenty of sites and news stories to visit. For instance, yesterday Citiwire carried a report Blackrock was concerned about China debt on the shrinking current account surplus – it’s fallen from 10.1% in 2007 to 2.6% of GDP today according to the IMF – and the fund manager has effectively downgraded the country.
There is an apparent credit crunch underway – mandated by government, but which many commentators now suggest looks like trying to close stable door after the horse bolted. And now we’ve got numerous blogs (many of them anti-China it must be said) suggesting the economy is actually already in recession and nowhere near the growth path claimed for it.
The conventional wisdom is anything below 7% spells crisis for the party and its efforts to keep the lid on the workforce. Low growth raises a significant risk of destabilising the jobs market and a systemic banking crisis. In a worst case: could the global economy withstand Chinese banking collapses on the scale of Lehman?
Now it looks like we are quietly being guided towards a 7% official China GDP target figure – could it already be lower?
Some folk think the pressure to create jobs to keep the urban proletariat happy is diminishing. Aging demographics mean the economy can now address domestic consumption and the many environmental disasters now apparent following the dash for growth years. Not so. The question; has the second largest global economy grown old before it grew rich and can’t afford pensions is an old, but significant problem. The new crisis is: what happens if a significant reversal in China becomes glaringly apparent before the leadership is ready?
Last week we had Paul Krugman in the NYT warning of “unpredictable, scarcely conceivable effects on politics and international stability” that could follow a steep China decline and crash landing. That was quickly countered with the usual.. “Don’t worry about China” responses.
But, finally, we are seeing the China questions asked seriously. It’s a very imbalanced economy, a point made strongly in a great (and timely) research note from Soc Gen y’day: “What if China Lands Hard”. It suggests China is set for a bumpy landing with persistently lower growth (heading towards 6% in a few years time). However, the report asks what happens if we get a hard landing now – sub 6%? In that case economies like Australia will be trashed, but I’m also thinking developing Africa, and new global trade chains from LatAm-China could also lead to a new global downturn – hitting the US!
In an extreme hard landing SG think base metals could be spanked 40%, oil by 30% while the US$ will rally and US Treasuries will outperform. Gold volatility and a new Asian currency crisis.
The potential scenarios are boundless. What about the excess capacity in China... and the possibility of a renewed dash for export growth (and all that implies about global trade wars) if the Leadership feels it has to maintain full employment?
It’s worth layering the Soc Gen analysis with another look at the China Leadership conundrum... they may be new, presidential and good looking (with popular wives in tow), but growing resentment against party excesses and the fact the urban workforce has seen 25 years of steady growth and cosseting by politicians begs the question: how messy might it get if the party stops delivering promised economic miracles?