Bye, bye China ‘stimulus put’

From the AFR:

China’s incoming Premier Li Keqiang has said the country needs just 7 per cent annual growth to achieve an “affluent society” by 2020, suggesting the country’s new leaders won’t roll out a big-spending stimulus package to bolster the economy.

He said China would not pursue “one-sided GDP growth” and development would be at a “medium speed” in the long term. He also said the redistribution of wealth would require a bigger role for the market in allocating resources, reviving hopes of financial reforms.

The comments were released to state-run media early on Friday morning.

Bye, bye China ‘stimulus put’. Hello long term commodity correction.


    • I’m not that bearish. I think closer to $80 is likely the long term floor.

      But who knows. If Pettis turns out to literally as well as theoretically right then $60 is on the cards.

      • Ziggy’ll be down to just his undies once the Finance vultures have finished with him if it drops to that.

        Doubt there will be too many tears from the general populace.

        • Er, you mean Twiggy not Ziggy. The Zigster is chancellor at RMIT these days.

          We know from recent experience that Twiggy can’t afford the WA royalties when ore drops below $90, so he’ll be totally screwed at $60.

          Couldn’t happen to a nicer person. Really.

          • Depends what the exchange rate does, surely. If iron ore drops to $US60 and stays there you’d expect the Aussie dollar to drop with it. If the Aussie drops to 66 cents then $US60 = $A90.

          • Andy DragoMEMBER

            MC: Aussie dollar dropping won’t really help Australian iron ore miners as much. My estimate is that only about 30 percent of costs is denominated in AUD. The rest is USD or other currencies. A big portion of cost structure is fuel, tyres, shipping, royalty and maintenance parts – none of which are AUD expenses. It’s a different story for coal miners but iron ore miners don’t benefit much from AUD decline.
            There was a good slide in one of BHP iron ore presos that showed that only 20 percent of FOB costs are labour. It will be even smaller percentage for CFR costs.

      • If fixed asset investment is 50% of GDP, doesn’t that imply that they have to keep building empty apartments and bridges to nowhere at the current rate just to achieve 0% growth?

        If they built 20 million empty apartments and ten thousand unnecessary bridges this year, surely they need to build another 20 million empty apartments and another ten thousand unnecessary bridges in 2013, just to keep FAI growth above 0%. Never mind 7%.

        That’s how maths works, right?

        In theory you could have 7% growth while FAI was declining, but since FIA is 50% of the economy…fat chance.

        Now if it was really 3% but they call it 7%, then you might have FAI at -1%, the rest of the economy at 7%, 3% overall, we pretend it is 7% by understating inflation and hence the target is met.

        Which is consistent with Pettis’ predictions.

        But that still implies they keep building empty apartments at close to the current rate, just to achieve 3% growth.

        Which in turn implies the current volume of iron ore consumption continues, at lower prices because of increased supply.

        It also implies that they will have 200 million empty apartments by 2020. But hey, there’s no law against that. It’s better than letting growth go negative.

  1. If 7% really means 5-6% before fudges then China’s leadership are aligned with Charles Dumas et al at Lomabard Street Research who reckon that around 5-6% is all that is sustainable.
    More importantly, no stimulus there means stimulus here in 2014 and a quick reversal on surpluses..AUD must respond surely.

  2. Semantics!

    “Rio, BHP and Vale are jostling for an edge in supplying the world’s fastest-growing major economy with key commodities such as iron ore, copper and aluminum. By 2030, China will need to build 50,000 skyscrapers — equal to ten New York cities — and there will be 221 cities with populations of more than 1 million, compared with 35 in Europe today, according to estimates from the McKinsey Global Institute.”

    • Mike Smith thinks that we have two decades of the super cycle to go.

      It was a good speech.

      I think that there are to many variables for anyone to be certain on either a demise or a continuation of the boom, but if I had to take a punt I would bet on the latter.

      • Did you ask Mike Smith that since his growth premise for China means a continuance of 20% credit growth vs 7% GDP growth if he was planning to take over a large bank in China as they transition from 200% to 900% debt /GDP ratio over these two decades?

        Seems like a no brainer!

    • 50 000 skyscrapers is 750 million tonnes of steel @ 15 000 tonnes per building. (That 800 meter tower in Dubai only used 40 000 tonnes. So this is assuming tiny 300 meter towers).

      2011 Chinese steel production: 695 million tonnes. Assume no further growth.

      In a year and half they can produce all the steel they need for those cities. By mid 2014

      There are a billion of them, assume 700 million cars, that is produced in the second year. Mid 2015.

      Assume another 300 million two tonne machines, that is done by mid 2016.

      The titanic weighed 25 000 tonnes, so you can build 24 000 of them by mid 2017.

      By mid 2018 you can build 15000 harbour bridges.

      This is assuming you haven’t already built heaps of empty cities, bridges, metro systems and high speed rail. But you have…

      • All the major CB’s will print (not the piffling 40B pm ) like there was no tomorrow. That much is certain.

        That and the potential for Basel3 to make gold a Tier 1 asset should ensure Gold has reasonably good support going forward for some time yet.

        • Certain? Few thing are certain. Possible? Yes. Probable. No. But that’s’ what makes a market; different opinions…..

          • Much more than probable and certain “enough” to put my money there Janet 😉

            I’ll keep my eye out for a CB that doesn’t print though!

    • correlation ≠ causation

      Can you imagine what the price of iron ore would be if there was 60 years of new supply being hoarded above ground? They aren’t really alike or connected in any way so not sure I understand making that comparison.

      That said IMO Gold will be $3000+ easily within the next 3-4 years which would mean $100 iron ore if the 1/30th rule continued.

    • Exactly.
      While the rest of the world hopes and prays that China holds decent form long enough for the US consumers to go on another consumption binge again, followed by the rest and the merry-go-round could continue. That would be the best case scenario I guess.

  3. Peter Fraser-isnt the problem with your argument that are NOT too many variables? If you are running fixed investment at 50% of GDP then you have to GROW fixed investment by at least 7% to meet that target(ie 107 empty new towns next year as opposed to 100 this year), unless you can find more growth in net exports(no chance-it is much more likey to be negative) or household consumption. But the challenges to growing household consumtion are massive because their wealth gets confiscated and change will take yonks.This is why Pettis argues that 3% GDP growth for China is more realistic.Others see 5%-but no everlasting super cycle that’s for sure.
    I wouldnt be giving my money to Mike Smith….

  4. The language of the China bulls in these situations is always fascinating to me: “China NEEDS TO build 10 New Yorks”, “and those 221 cities REQUIRE XYZ”.

    This is written as if need MUST be met.

    Its ridiculous. The Chinese economy NEEDS to PAY for these things through increased consumption and higher wages, and its showing few signs of being able to do that over the medium term.

    • Yeah, its like the argument that China must urbanise because it has a lot of people, or its on point X of some industrialisation curve that other countries followed in the past.

      Its absurd, but its mainstream thinking in Australia.

      The reality is, China will build all this infrastructure when its economically viable to do so. If you build stuff that no-one uses (or no-one can afford to use) you go bust, I don’t care what economic system you’re running. To the best of my knowledge China has already built enough apartments, highways and shopping malls to keep them going for at least a couple of decades. What they need to do now is boost the incomes of the Chinese people so they can start using all this stuff they’ve built.

      Li Keqiang seems to get it. Lets hope he delivers.

  5. For further interesting discussion of this issue(sustainable GDP growth) see Izzy Kaminska in today’s FT Alphaville. Sorry cant link it.

  6. I know China is overbuilding because the last warehouse that I rented to consoldate and ship a container full of furniture over was the ENTIRE GROUND FLOOR (unfinished!) of a recently built multi-story commercial building in a proxy city near Guangzhou for pretty damn cheap.

    Plenty of such buildings and bridges to nowhere the last time I visited. I really wonder if any of you China bulls ever really visited the country and do businesses there?