This pretty much sums up the MB view, from the AFR:
AustralianSuper, which has $80 billion under management, believes asset prices in China will be hit when credit is eventually tightened and will stay on the sidelines until this adjustment is over, according to its senior manager for Asia, Stephen Joske.
…He believes over the next decade, China’s growth will be much less reliant on resources such as coal and iron ore.
…Mr Joske does not believe China will have a banking crisis, but says the inevitable tightening of credit will hit asset prices and cause a short-term downturn in the Chinese property market.
…The biggest impact of this may be felt in Australia, according to Mr Joske, as iron ore prices, already hovering near a five-year low, face a further hit of as much as 20 per cent.
…Mr Joske expects the Chinese government will wait until after a key parliamentary meeting next March before it begins tightening credit, a process which may take two years.
At this meeting China’s leaders are expected to opt for a lower growth target than this year’s 7.5 per cent, allowing it some room to address the debt issue.
Joske could be right or wrong on the timing but not the outcome. This process began several years ago and is now going through stages of stimulus supported deceleration as the growth target is repeatedly cut. Such structural adjustments take time but they do happen. As a nation we should be preparing for it not sticking to dated notions of selling ’em dirt. A long term iron ore price of $60-65 is right on the MB view.
Also of interest, in Joske, Australian Super is the only fund to have a man on the ground in China…incredible.
Adding to the souring China flavour today is David Uren on new study from Larry Summers:
GROWTH in China and India is much more likely to drop to about 2 per cent than it is to continue at anything close to current rates, while an extended period of recession is probable, according to a new paper by Harvard University’s, Larry Summers.
…“China’s super-rapid growth has already lasted three times longer than a typical episode and is the longest-ever recorded. The ends of episodes tend to see full regression to the mean, abruptly.”
…The study looks at the 28 episodes where countries have enjoyed growth rates of more than 6 per cent over at least eight years. China, which has now been growing that fast for 33 years, is the longest-lived expansion, with only Taiwan’s run between 1962 and 1994 coming close. The average is only nine years. Nearly all ended with an abrupt deceleration, with median growth slowing to the world average rate of 2 per cent.
…A key reason for the difference is institutional quality. China’s rapid growth over the past three decades shows that “organised” corruption can be a “veritable greenhouse” for growth. Firms can reach arrangements with the state that deliver high and secure profitability. “As firms either ‘seize the state’, or are the state or are chosen by the state, the official legal and regulatory environment — or more particularly its implementation — are bended to provide great, if super local and specific, conditions for growth.”
But when power shifts, relationships are severed and there are no institutions to fall back on. Growth slows dramatically.
This is overly gloomy in my view. China has corruption but also very high calibre technocrats and still has plenty of “catch-up” growth dynamics to exploit under the right management.
It is also useful to remember that Larry Summers was wrong about the “Asian tigers” and the Asian financial crisis in the nineties for similar reasons. During the crisis he recommended fiscal retrenchment as the cure to “crony capitalism” when what was a really happening was a private debt crisis and current account correction that demanded fiscal expansion. Several depressions resulted.
One could also observe that Summer’s played a crucial role in the rise of the US’s own crony financial system. None of this is to say he’s wrong but perhaps it does speak to a few personal biases.
I expect China to revert to mean, and some cyclical pain along the way, but also ongoing development at growth rates better than developed economies.
