Can China save us again?

The 2008 Global Financial Crisis (GFC) brought about an extraordinary fiscal and monetary response from the world’s governments.

Nowhere was this response as grand as in China, which rolled out an enormous stimulus package worth some four trillion yuan ($US570 billion), mostly in the form of fixed asset investment, including the construction of roads, railways, and buildings.

To say that China’s stimulus package was a ‘success‘ is an understatement. As the Western economies entered recession in 2009, the contraction of Chinese exports – which lopped around 3% off China’s GDP – was more than offset by an increase in fixed asset investment, which peaked at a whopping 90% of GDP in 2009 (see the below chart).

A key ingredient of China’s fixed asset investment is steel, which is used in the construction of buildings, structures and machinery, with the construction industry accounting for more than half of China’s steel consumption.

Earlier this month, Tom Conley presented some fascinating RBA charts on China’s steel production, which has expanded rapidly, growing at an average annual rate of 7% during the 1980s, 10% during the 1990s and around 20% in the 2000s:

Following this strong growth, China now accounts for around 45% of global steel production, compared with around 15% at the start of the 2000s:

And with this growth of steel production, the Chinese have become increasingly reliant on imported iron ore and coking coal:

Australia, which is a major exporter of both iron ore and coking coal, has obviously benefited immensely from the increased demand from China, as evident by the surge of contract prices since 2005:

This price growth has helped send the RBA’s index of commodity prices into the stratosphere:

And sent Australia’s terms-of-trade to near 60-year highs:

But with the global economy slowing dramtically, there are question marks over whether China has the ammunition to stimulate growth a second time? Here’s Canada’s Globe and Mail (h/t Bernard Hickey):

Now, nearly three years later, as a debt-laden Europe and a jobs-starved United States teeter once again on the precipice of recession, all eyes are back on China. Can the Middle Kingdom save the world again?

The answer, according to experts on China’s economy as well as Chinese business owners and consumers, is probably not. At least, not in the same way it did last time.

China’s economy is in a very different state today than it was at the start of the global financial crisis in 2008.

The country is still dealing with the side effects of its previous stimulus package: burdensome local government debt, stubbornly high inflation and a red-hot housing market that many say is set to blow up.

“I don’t think China will fill the void of growth that is left from a slowdown of the Western economies at this stage,” said Na Liu, the founder of CNC Asset Management and an adviser on China strategy to Scotia Capital.

“A new ‘shock and awe’ stimulus package from China like the one in 2008 is almost impossible at this stage”…

“China’s economy is weaker today than on the eve of the global crisis three years ago and won’t be able to shrug off the problems elsewhere or be able to completely offset them,” Mark Williams, the firm’s chief China economist said in a report this week.

Indeed, Chinese manufacturers, a crucial element of the country’s export-driven economy, today are grappling with a host of problems they didn’t face just a few years ago. Spiking labour and production costs, along with fast-rising competition, are grinding China’s manufacturing engine…

A factory owner named Mr Chen offers some interesting anecdotes about China’s manufacturing industry:

Many of the factories here that helped the world out of recession are now gone. The low-skill garment factories were the first to go, and now other owners are either shuttering their operations completely or moving to the Chinese interior. As the economy in China has sagged, Mr. Chen’s customers are taking longer and longer to pay for orders, asking for 30-, 60- or even 90-day payment periods, which have hit his cash flow and made him increasingly reliant on loans. However, since the state-owned banks are refusing loans to small to medium-sized businesses like his own, Mr. Chen says, he has been forced to rely on private lenders with usurious interest rates as high as 60 per cent…

“Now you have vacancies in every industrial park … If I move inland, the property there will just increase in price, too, and then what will I do?” asks Mr. Chen, standing in a crisp white shirt and khakis, holding up his hands with thoughtful resignation. “All I can do is increase efficiency. This year, I can squeeze out 20 per cent. But next year? The salaries must rise. I’m not sure I can survive.”

And an anonymous senior economic analyst that consults for the Chinese Government further cast doubt on the Chinese Government’s ability to stimulate growth a second time around:

“China may not have the same strength we used to, [in order] to help the global economy… The analyst pointed to persistent inflation, decreasing manufacturing and exports, and weak domestic consumption as evidence of China’s inability to pitch in as the world confronts yet another global downturn. “China cannot do the same things that we did in 2008.”

Still, some economists are pointing to China’s massive long-term urbanisation process, arguing that demand for commodities will remain strong:

Indeed, China’s plan to develop infrastructure and promote more urbanization in the country’s second- and third-tier cities will sustain strong economic growth and commodity demand from Western countries like Canada for years to come, according to analysts Andrew Keen, Thorsten Zimmermann and Lourina Pretorius at HSBC.

“In terms of long-term structural trends, demand is now driven by an urbanization process that is far more structural than consensus generally believes,” the analysts said in a recent report. “On our analysis, China is only 20 to 25 per cent along the path towards being a mature materials market and it may take at least six to nine years before demand intensity peaks.”

Resource company executives are making the same bet.

There may also be greater  confidence amongst Chinese policy-makers following the success of their 2008 stimulus to innovate and produce a second round of fiscally-driven growth. Let’s hope that the bulls are right.

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  1. UE the prosperity and demographics issues are never addressed in these MSM articles that pretend to have some expert opinion on China. Some of the writers need to get out of their expensive Hotel rooms at the Hyatt and get out into the local ‘towns and villages’
    As Mr Chen says salaries must rise. In factories we deal with salaries, one form and another, have risen between 23 and 28% every year for the last three years. Even so, they have serious trouble keeping workers.
    There are no longer 50 or 60 workers outside the factory gates every morning wanting a job. Factories have to look for and advertise for workers.
    In one factory, that we occupy a majority of their production we, ourselves, employ a training officer to continuously train new workers to work to the standard we need.

    Prosperity is bringing the same problems as it does here. Workers no longer want to work shift work for a 25% loading
    Then of course the maths of the aging effect of their one child policy are frightening and are now beginning to come home to roost.

  2. Given the “domestic consumption” and “decoupling” meme that our MSM commentators are now running with, it would be interesting to ask these factory owners/managers if their factories are scaled up for global or regional or local demand.
    They will probably recoil in horror if they are told domestic consumption will drive the demand for the trinkets they produce.

    • Pretty obviously China is scaled up for exports. However, from the factory owners viewpoint the Govt stimulus is amplifying their labour problems.
      The wage increases are coming from two directions. Clearly the Govt is trying to get domestic demand going through legislating for such things as Health insurance and Super. In addition wages are rising from a labour demand issue.

      I don’t know what the outcome will be for China itself. Who does? However this much is absolutely certain. The China we deal with for the next 30 years will be very different to the China we have dealt with for the last 30 years.

      I don’t know why no one understands that!! Again stupid group think amongst academia and the Public Service i suppose. Nothing like an Ivory tower to separate you from reality

    • Typical statement from someone like Target…find someone else to blame!!!
      They will have one hell of a job getting 5% from most suppliers. Inflation is rampant already, now we have a falling A$ which will add about 10% to imported costs. I doubt too many businesses are left with 15% fat to donate to Westfarmers!!!

  3. Great information but I’m unconfortable with the premise or the title.

    If someone saves my life, i’m sure I’d be very grateful even though I’m going to die one day. But if someone saves me from a beating so they can perform GBH down the track, they’re not getting my thanks.

  4. Can China save us again? Yes! Will they? No. Not without serious concessions.

    The uber game being played at the moment is “last man standing.” After WW2 it was the USA. Think Bretton Woods.

    China saw first hand the destruction of the USSR in the culmination of the Cold War. It also witnessed the Western sleaze strategy of “carpetbagging in the FSU.” This will not happen to China.To be forewarned is to be forearmed. It witnessed the failure of Socialism in the non-West.

    What we are witnessing is the failure of Western Socialism. Western institutions are failing from “crony socialism” not crony capitalism. Crony control fraud.

    The West and the Rest are drifting towards an “Authoritarian Free Enterprise” Model. This model is the preferred model by the former Eastern Socialists. It will also be the model for the West, whether we like it or not, as we refuse to embrace either markets or capitalism. We are becoming like them as fast as they are becoming like us-convergence to the AFE Model.

    One only has to read the Chinese strategy book for both business and politics to see it. Sun Tzu’s “The Art of War.” In laying plans it begins with the Moral Law.
    Example: Premier Wen declares a “Financial Fatwa on the Freaks of Finance”, with a bullet.

    It’s the Europeans turn to fire the shot. They are stalling. Why? They know that the USA is worse basket case than Europe. He who fails (possible first) in the last man standing game becomes the fall guy. Remember the gum flapping from Rudd/Swan about the problems overseas causing the GFC along with the failure of markets? The blame game.

    Last man standing equals first out of hospital after the collapse.

    Can China save us? Who is “us” exactly? The Labor Party? Liberal Party? Yes the Chinese could save us. It could internationalise the “Financial Fatwa on the Freaks of Finance.” A hunting license.

  5. It should be as simple as investing in stuff that has poor returns, no? This was Japan in the ’80s — it has all the familiar symptoms for those old enough to remember it but not too old to forget — and I’m having a hard time differentiating with China today.

    Too much investment == bad things!!!

    I’m with Roubini et al on this one.