Is a Chinese band aid next?

As Barack Obama delivers another impressive speech in America and Mario Draghi in Europe generates another impressive rally through targeted short-term bond purchasing, policy makers in China are seemingly working on some pretty impressive stimulus plans of their own.

After months of doom and gloom – some of which has finally caught up here in the form of declining ore prices and a raft of project cancellations from major companies – it seems that political leaders are doing what they’re supposed to do and leading where the economy won’t. After months of waiting, bold reforms are outlined, fresh ideas generated and new hopes are emerging.

Yet beneath the soaring rhetoric and the market intervention, concerns are already being raised that what we’ve been offered are, again, merely short-term fixes.

While short-term fixes – like the doctor who prescribes a Band-Aid and an aspirin to a hypochondriac – are often as good as anything else, the concern is that the world’s economic imbalances are still so great, five long years after the credit crunch, that political jawboning and monetary policy won’t nearly be enough. Band-Aids, the argument goes, need to be replaced by tourniquets and aspirin by morphine.

There are hopes that stronger medicine, thus, is about to be administered in China, whose economic policy makers are rarely known to do things by halves. And leading up to what appears to be the 18th Communist Party Congress in mid-October, signs are emerging of concerted fiscal stimulus efforts across multiple projects and multiple provinces.

But just as Western efforts look flimsier at second glance, there are indications too that Chinese stimulus may not be all it’s hyped up to. Despite arguments that Beijing needs to placate its citizens through gleaming infrastructure and strong economic growth, the reality of haphazard construction and unequal wealth distribution suggests otherwise. And despite the announcement of a string of development projects at the municipal and provincial level – forming, in aggregate, a multi-trillion Yuan pipeline – credit, manufacturing, freight and steel production data suggests that these are for all intents and purposes still the dreams of mid-ranking bureaucrats.

If anything, China’s new Politburo is likely to announce stimulus of a very different kind: true, long-term reform to welfare, internal migration and healthcare, evidenced by the equally urgent challenges of rural unrest, urban unemployment, soaring living costs and demographic imbalance.

This, of course, would be wonderful for China’s people, unlike the sticking-plaster solution of further urban construction and fixed-asset outlays, such policy reform won’t restart the iron ore mines of the Pilbara or the investment banks of London and New York. And whereas China’s mammoth 4 trillion Yuan stimulus package in 2008 came in response to a crashing global economy, today the main concern is not whether Greece will exit the Euro, whether the United States will face a fiscal cliff or indeed whether Australian miners will have to sack a lot of workers, it’s whether the deteriorating cash-flows and capital productivity of the uneconomic boondoggles that 2008’s stimulus first wrought will damage China’s financial system or create a solvency crisis for heavily-indebted local governments.

Turning to analogies of Chinese medicine, China over did it on the stimulus during 2008 and now, with a case of severe indigestion, it needs not more of the same but the fiscal equivalent of herbal tea. Such natural remedies aren’t likely to provoke the adrenaline rush that markets have become so addicted to since Alan Greenspan first stimulated the US out of the dot-com crash and post-9/11 crisis however, so while China will most likely make a full recovery, the world’s other economic patients are unlikely to get much benefit.

Several months ago I agreed with the consensus that there was a strong likelihood of significant Chinese stimulus in the second half of 2012, but the country’s political economy has since changed in profound ways. Ostensibly, the same people are in control and the same priorities are pursued, but China’s reformists have gained the upper hand in Politburo jockeying, with Bo Xilai’s political purge followed by the side-stepping of Hu Jintao ally Ling Jihua for a position at the top table.

Since that time too other policy constraints have presented. Capital outflows are hindering central bank operations, while rising pork and petrol prices are stoking fears of inflation. As local government revenues decelerate on falling land prices, and state-owned companies seek early rescue packages and bad debt refinancing, the only policy tool left in the kit – to paraphrase economist Andy Xie – is propaganda.

Despite having ample funds at its disposal and the ability to quickly discharge bold initiatives, it beggars belief to think that China will add to its woes by compounding a fixed-asset overhang, a capacity utilisation glut or a potential non-performing loan crisis through conventional pump-priming and roads to nowhere. Building on the lessons of Japan and the Soviet Union, it appears increasingly likely instead that China’s new guard will turn crisis into opportunity through a wholesale rebalancing to sustainable consumption and wealth redistribution, tackling at the same time rising challenges of chronic disease and ecological damage.

This, after all, is what China’s leadership says it wants. And though we may, perhaps selfishly, hope for otherwise in Australia, this non-stimulatory kind of economic stimulus looks like what China will deliver.

Michael Feller is an investment strategist at Macro Investor, Australia’s independent newsletter advising on stocks, trades, property and fixed interest. Macro Investor is running a series of specials on how profit from the end of the mining boom. Take up your free 21 day trial today.

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Comments

  1. “As Barack Obama delivers another impressive speech in America”

    That is the only thing he is good at.

    • His foreign policy has been good. Given the poisoned chalice he was handed the economy is as good as could be expected. His reform of Wall St is not as good as it might be but better than I’d feared.

      • Obama was always going to disappoint. Given the catastrophe he inherited its amazing he’s even in the running for another term. Can’t see him losing to Romney, can you?

      • HnH wait until his health care reform kicks in and then tell me that. Lorax is right I dont see Romney beating but he is not much better of a choice either. I wished they had a box that said none of the above. That is what I would be ticking. Anyways going to be interesting to see how much China stimulates.

        • I’m not sure whether the ‘ObamaCare’ idea is popular, or even useful but I know that something needs to be done. My housemate worked in the finance industry in New York for a few years. One day she needed her script to be filled in a rush. She went in, told the doctor what to write, and then left. No more than 15 minutes was spent in the presence of the medical practitioner and he did not provide her with any medical advice. Her bill was $600. A second anecdote that I recently heard involved stitches. Someone had accidentally drilled through their fingertip. They went to seek treatment, that is, to get some stitches. It was going to cost around $1000. This person walked out, cleaned the wound and then super-glued the the flap into place. He then bandaged it up and hoped for the best. Fortunately the best occurred. In my opinion, a country where basic medical treatment is costing that much has to be concerned about the the social consequences that it will cause. It also seems to be rather uncivilised.

          • I bet they can’t beat the dentists in good ol Australia. Wait until Denticare goes full steam.

            I have known of a case where a person was charged $5k (to be paid by the govt under the old discretionary Care plan) in ONE SITTING!

            Then there is the case in NSW where the court found a dentist guilty of charging one person $90k in needless treatment and the dentist was never even disciplined by the ADA, forget disbarred.

            If my kids want to make pots of money, I’ll tell them to become dentists.

          • Footsore,

            I agree something needs to be done. I am living in the US(Nashville, Tennessee) now and the health insurance costs over here are through the roof. I know of people paying for a family of 4 600 to 800 a month just in insurance. Thats after the employer pays for some of it. I can tell you where the cost is the doctors malpractice insurance. I knew a doctor over here who was running a small clinic and was paying over 100-120k a year just in malpractice insurance. If the govt fixed that then I dare say it would fix alot of things. The other side of the coin over here is I dont pay near the taxes I did there plus cost of living is a hell of lot cheaper, housing etc. Had lunch today in a nice restaurant with a friend and it costs $22 USD that included the tip. I bought a case of beer bud light (24 cans) for $26 USD(Granted Aussie beer is a hell of lot better). Gas over here is running at .88 a liter. The one thing that sucks is if I hire an employee(I run my own business) then whether they need health insurance or not I have to buy some for them or pay a fine. (Its cheaper to pay the fine). There is alot of the Obamacare i dont like. I bought a house 15k south of Nashville and its 1900 Square feet and it was 166,500 USD in a decent area. I didnt pay any stamp duty. We just had to pay our first year rates which was 1600 USD. I dont disagree with them fixing it but Obamacare is just a thrown together bill that needs to be completely redone.

          • LBS,
            I was aware that the major cost of the $600 consultation was to cover the doctor’s malpractice insurance. One of my other housemates is a doctor and when we were discussing this he said straight away that he wasn’t surprised at such a hefty consultation fee because of the litigious nature of America and the need to cover yourself should something not go to plan. He also spent 6 moths as a medical student in Norway and he highly praises their model of health care.
            Mav,
            In regard to dentists. My girlfriend had a sore tooth, saw a local dentist and was hit with an outrageous bill and was then told that she would need a root canal. They were very prompt in giving her the costing for such a procedure. She said nada. The procedure they performed on the day was bungled and caused more problems. And every few months they send her a letter to remind her that she “needs” a root canal. Luckily she is Japanese and was going back to visit her parents not long after. Dental work is free and functional over there. They fixed her up and told her that she had no need for a root canal.
            I also happen to know a dentist who would not open their own practice because she says that it costs a few hundred dollars an hour just to have one chair running.

  2. Australia selfish?! Be careful there, you may find yourself under investigation for un-Australian activities.

    Have you noticed the MineBot’s new subroutine is now repeatedly generating posts that rebalancing must wait, China needs to stimulate FAI to maintain growth, social stability etc. What makes you so sure they won’t go down the investment path again?

      • I guess they need to stimulate to a point where it keeps growth ticking along but doesn’t drive coal and ore prices up into the stratosphere.

        I’m not sure why it hasn’t occurred to the China cheerleaders — sorry, I mean Australian policymakers — that record high commodity prices are not in China’s interests.

        • A return to record commodity prices is not on the cards any time soon. I don’t think anyone is suggesting such (apart from the occasional Caipirinha inspired Vale exec).

      • I agree with that. Best info is that new leadership policy will address both the social and FAI.

        Let’s not forget that the steel sector is very powerful in China, with long term goal of major global provider of full range of ferrous product. Property/construction interests remain highly influential and will be appeased.

        Bring it on.

        • Sure, but does the Chinese steel sector want to pay almost $200/t for ore?

          I think the best we can hope for is ore returns to its long run average around $80/t, the AUD settles in the 70-90 cent range and we can all be happy.

        • steel sector is very powerful in China… Property/construction interests remain highly influential and will be appeased. Bring it on.

          3d1k, you do realise that you may sound like a sociopath to people when you champion the cause of Chinese rent seekers against the needs of the masses of Chinese savers?

  3. Can I ask someone to look at copper? Iron ore is getting all the attention but it seems to me we could learn just as much about what is happening in China from Dr Copper.

    • Thanks for those Alex. In Obama’s defence the crippled state of US partisan politics politics has not helped.

      • True, although better presidents have managed to overcome such obstacles. The Economist report card is actually OK in parts, which I think is a fair reflection of his presidency. He definitely faced a very difficult situation when he came into office.

        • Agree that he’s inherited a multiple organ failure and has got about a third of it right.

          Not sure about the “better president’s” quip, the partisan politics from long-term contacts in DC is now at a level not seen before.

          • Maybe not seen before in the lifetimes of current political operatives. I was thinking further back.

    • dumb_non_economistMEMBER

      Alex, 2d and Jackson,

      Like I’ve said before my economics understanding is at the same level as Joe Hockey’s so be kind to me, but at a brief look at the above links figures I see that UE Rate, Av wks UE, ToT UE are up while the participation rate,employment to PoP ratio and median income are down, however what would you expect given the GFC or maybe more appropriately the Great Recession as it’s called OS.

      All this comes from………………..

      Dr. Anthony B. Sanders
      Distinguished Professor of Real Estate Finance
      Professor of Finance.

      If anyone from RE in Oz had posted this about an Australian PM he would be howled down by all of you!

      • Not if he had backed it up with charts from authoritative sources, like Sanders did. All his charts come from the St Louis Fed.

        • dumb_non_economistMEMBER

          Alex,
          It’s not his source; who would expect any of those points to have improved given the circumstances. Would you expect anyone else to have done any better and if so, who?

          • Obama promised to do a lot better. Whether someone else could have done better or not we will never know. But see the comments about Obama from Bob Woodward’s new book in the link below.

          • PS McCain was the only other person who could have been elected. He might have done better, but I wouldn’t put any of my money on it if we could rerun history.

            Clinton would have given it a shake.