By Michael Feller
In the weeks since last writing (see Running with the China bears) I’ve been busy working on Macro Investor, the free trial of which I hope you sign up for. But I’ve also been keeping one eye on the macroeconomic forces that continue to shape the landscape in which we invest. And while most of that eye has been gazing over Europe—whose next hurdle is now the July 10 meeting of Germany’s constitutional court in Karlsruhe—some of it continues to look at China.
And what a sight it is. As you would read daily in our excellent contributions from bloggers Sinocism and Zarathustra, highly experienced financial market insiders based in Beijing and Hong Kong respectively, events are happening in China faster than a bribe on a Ministry of Railways bullet train.
And not all these events are good. While the Wall Street Journal has pleasingly (for Australia) reported that average major city house prices have risen, for the first time in nine months, PMIs very much continue to disappoint. And although spending on services seems to be rising, indicating that perhaps the Great Purse of the Chinese consumer is beginning to open a little, that could all come to an end if hit by externally-produced inflation, whether on the back of increasing food prices due to the US heatwave, or Iranian threats to block traffic in the Strait of Hormuz.
Amid the clear and present risks to the Chinese growth story, which bull and bear alike would admit relies upon Beijing walking a very fine policy line, respected investment title Barron’s has joined the list of publications questioning the origins of that growth:
Present growth in China, to paraphrase the oft quoted exiting premier Wen Jiabao, is neither sustainable nor balanced, but transiting from that to a more sustainable or balanced model of growth—if such a model indeed exists (please, someone tell me and I’ll be rich)—is easier said than done. It requires a high degree of concentration, both in terms of power and focus, and a great deal of luck, not to mention a clement external environment, which we clearly do not have, viz Europe.
My concern is that Beijing has been distracted from transitioning the country’s mammoth and historically unwieldy economy to a new model without upsetting the political contract it has with its nonvoting populace ahead of this year’s Politburo handover. This concern, which I’m hearing is shared by a number of foreign policy experts on the ground, is due in part to the Bo Xilai incident, which has shaken that political contract to its core, but also more generally with widespread dissatisfaction due to worsening inequality (not officially measured since 2005) and a deterioration in other intangibles like clean air, water and food supplies (again, sporadically measured) at best.
With Beijing’s corridors of power engaged in byzantine politicking and not technocratic policy making it’s no wonder that signs of a credit crunch are emerging in the all-important, for Australia at least, bulk goods trading sector, leading to depressed Newcastle coal and iron ore swap prices at a time when other commodities are going gangbusters. Witness, for instance, the change in direction of oil to July 3 compared with iron ore and coal.
Nor is it surprising that the policy response to a slowing economy has been piecemeal, rather than quick, sizeable and forceful as it was in 2008/9.
Insofar as Australia’s China-leveraged houses and holes dynamic is concerned I am fairly confident that Beijing’s mandarins will look beyond the Zhongnanhai’s parapets in time to restimulate, whether in a ‘mini-me’ format, or something else. Nevertheless for every day they remain distracted the risks of a crisis increases. The Chinese have a saying: “Doubt and distraction are on earth; the brightness of truth in heaven.” They also have a saying: “A spark can start a fire that burns the entire forest.”
A full essay on China’s current political challenges will be published in next week’s Macro Investor.