The new China is ex-growth and ex-‘Straya

From Citi following a recent Beijing tour:

Is the PBOC behind the curve? Conversations in Beijing seem to point to the risk that the PBOC may be rather slow to respond to some of the strongly disinflationary pressures that exist in China right now: the fall in commodity prices; the effort to avoid credit-bubble risks; the confusion surrounding local government spending; the continuing adjustment in the property market; the risk of monetary contraction induced by capital outflows; and the steady rise in domestic real interest rates.

Chinese authorities seem quite determined to wean the economy off its dependence on credit stimulus. The mood among policymakers clearly emphasizes the ‘quality’ of growth rather than the quantity. Since Chinese GDP growth in recent years has relied heavily on credit extension, this new emphasis points to a more or less sustained fall in the rate of total credit growth.

Following from this, there is a wide consensus that GDP growth remains on a downward path. The IMF is forecasting growth at 6.8% this year, and expects real estate investment – 14% of GDP – to contract in 2015, a far cry from growth rates of around 20% in 2012 and 2013. Reportedly President Xi mentioned a growth rate of 6.5% this year to a group of European leaders.

The fall in growth might be particularly acute in the early part of 2015 as local government spending is under pressure. Chinese local governments are facing hard budget constraints for the first time.

There seems to be no appetite at all in Beijing for a notably weaker nominal exchange rate, not least because there has been some evidence that exchange rate volatility in 2014 has undermined China’s efforts to internationalise the RMB.

That’s pretty clear, no? Chinese growth will slow and its composition shift away from credit-juiced building. No need to recycle the charts again, they all point in precisely the same direction.

This is the end of commodity super cycle in black and white. It needn’t lead to crisis for China (in fact, is designed to avert just that) but it will still destroy the basis upon which Australia just restructured its economy, to a higher commodity dependency.

Let’s take a glass half full approach to this and play it out. If Chinese GDP falls half of one percent per year for the next five years, that will have it growing at a  rate of 4.8% in 2019. That’s a pretty generous glide slope given that since 2010, Chinese growth has on average slowed more than 1% per year and no hard landing or accident is accounted for.

If the quality of growth has improved each year as well – more driven by innovation, productivity, services and consumption and less by wildcat credit funneled into crazed urbanisation – then we’ll very likely see the investment component of that growth fall, to say 40% from today’s 50%.

In that event the Chinese economy is one-third larger in 2019 but the total real dollar value for Chinese investment is only 6.5% above its current level and is falling.

There’s more. Within that investment mix, you’d expect a second qualitative shift from commodity-intensive unproductive building to higher value-add projects like cleaner energy, greater services orientation and more sophisticated factories.

It is therefore fair to suggest that the Chinese investment that drives commodity demand for Australian dirt is more or less at its peak right now. There’ll be a decent tail on it but that’s not much chop to those that have built capacity to service endless growth.

‘Straya needs a post-China, post-commodities debate. Now would be good.

Houses and Holes
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  1. ‘Straya needs a post-China, post-commodities debate. Now would be good.

    It certainly does. As far as I can make out it has needed one for about a decade, and our body politic and administrative and corporate elites simply refuse to address it, while our media is stuck in a weird form of ‘hits and memories radio’ single channel……….all the while euthenasing those parts of the economy we will need to change economic direction and feeding them to the economic parasites which are well on the way to consuming the host and keep telling it that what they do is growth.

    There has been policy failure in Australia, on an epic scale.

    • The time to fiigure out our post-China strategy was when we were deciding to get into China, maybe fifteen years ago.

      As part of the broad based debate we had on the merits on the ‘bet the house on China’ strategy.

      • Exactly.

        Exit strategy is one of the first things that should be determined for any business.

        What is Australia’s end game? Would have been handy to give it some thought before rushing in like we did. MB nailed it the other day when they more or less stated, “Australia, the luckiest and most mismanaged economy in the world…”.

        Just another example of short-term interests being put ahead of long-term thinking.

  2. Nothing here that has not been said-quite rightly- a hundred times on MB. Time to move on to focus on new policies and new solutions-not past mistakes.
    You need a new agenda MB.

    • The MB agenda is as fresh today as it was last year; 3 years ago. Until others move one, how can MB move on? The problems of the past/present have to be resolved before any new agenda can be put forward, and MB will not doubt evolve at that time.
      Until then, watching the social and economic horror show on stage is not at all entertaining.

      • Its futile. Lets cheer on ZIRP. Let this thing blow up properly and maybe try to rebuild something better from the ashes.

      • “Lets cheer on ZIRP.”

        In the end, it’s really just mental masturbation that is very unlikely to change anything about what will happen and our “leaders'” responses to it.

        The only thing you have control over is your own investment and other decisions. I’m against continually dropping interest rates but I’ve done well investing on the basis that they were coming and will be around for a while.

        (Not property, other than my house, but bonds have done very well. People laughed at me when I bought AGBs five years ago…)

    • … and Terry …we are muddling along, with the usual political antics and attempted diversions, to deal with the structural issues of the New Zealand housing market.

      What are the Australian authorities learning from this ?

    • Unfortunately, while the end of the neo-liberal monetary policy epoch – including the outsourcing of economic management to ‘independent’ Central bankers – is crumbling before our eyes and is obvious to just about everyone who visits these pages or takes more than a passing interest in economics, that fact is only starting to be understood out in the broader economic community.

      The general public have no idea.

      The politicians have no idea – just beads of sweat and an ongoing feeling of panic.

      The best thing anyone can do is try to increase the number of people who have some understanding.

      It is not impossible – once upon a time even the bell hops knew what the J curve was.

      10,000,000 informed people is nothing more than 1000 people telling 100 and that 100 repeating the process.

      Most Amway Diamond distributors could do that before lunchtime.

      • Pfh007 … You may find these recent articles from the UK Telegraph of interest …

        How central banks have lost control of the world – Telegraph
        … with brilliant graphics …

        Federal Reserve fears early rate rise will derail recovery – Telegraph

        Quite what is “neo-liberal” about much of the central bankers behaviour is something of a mystery.

      • “Quite what is “neo-liberal” about much of the central bankers behaviour is something of a mystery.”

        The idea that the management of the economy should be removed from government “meddling” is at the core of the neo-liberal movement towards central banker independence and de-facto management of demand with interest rates.

        The neo-liberals believed the move to central bankers independence to be an advance because it removed the economy from the hands of politicians.

        Unfortunately, they were mistaken because the economy is inherently political and fixing the political process is the solution and not trying to avoid it by placing economic management in the hands of a independent central banker priesthood with a limited monetary policy lever.

        By trying to manage demand with interest rates – read household debt – Central Bankers have created the mess we are in and they are powerless to fix the problem. Only government has the power to reverse the mistakes and fix them.

        Neo-liberals are no help because they can’t accept that completely free markets are not self regulating and a myth in any event. So they keep insisting that less regulation is the solution instead of accepting that sensible regulation is a must.

        If central bankers were to manage the economy they need to control fiscal as well as monetary policy but if you are going to do that they need to be democratically elected.

        Which means we are back at square one.

        The elected government controlling monetary and fiscal policy.

  3. The China trend seems pretty clear …

    Chinese Home Prices Suffer Biggest Annual Drop Ever: Why This Matters | Zero Hedge

    BDIY Quote – Baltic Dry Index – Bloomberg … 516 … down 6.0 … down 1.15%

    This time last month Zhang Xin of SOHO Developments had this to say …

    Davos 2015: China property tycoon calls top of urbanisation drive – … google search title if blocked …

  4. Given the likelihood that a China slowdown is almost certain, as an investor with a significant stake in the outcome for Australia I’m interested in ways to minimise my financial stress. Many readers here focus on trying to beat the markets with intelligent investment decisions, and I share this preoccupation to some degree. Others advocate better government policies decisions.

    However, since the GFC I’ve decided that there are simply too many unknowns within our hyper-complex globalised world to act with any degree of certainty. Consequently my approach is to live well within my means so that I can observe and learn from these events from the perspective of a somewhat detached observer. These are fascinating times indeed and show every likelihood of intensifying in difficulty over the coming years. Dealing with real difficulty has been the best teacher in my life and to my mind is the primary way us humans have grown in consciousness over the centuries.

    • I agree and thus invest mostly in wine and fast cars which depreciate as fast as most of my investments, life is too short

    • Well Put Geof way too many unknowns or at least let’s call them variables that no one controls so the outcome can be a myriad of possibilities.

      And likewise Alby, Motorcycles,Rum,Wine,Cigars…Good to find that balance between making money and spending it though…

  5. pretty clear ‘Straya does have a post-China policy. You may not like it, or agree with it, but its staring you in the face:

    – local constructions boom fed by ultra low interest rates and continuance of generous tax concessions. While calling for MP is right, it will never happen as it upsets this key policy.

    – an all out currency war, to hope revive the manufacturing zombies combined with cram down of local wages and conditions for the working serfdom via work visa relaxation, to make manufacturing more competitive

    – importation of foreign capital via concessionary visas, like a mini-Monaco for Asia

    – beating the commodity price crash via a production pump – gotta save those big miners and their foreign shareholders!

    thats the plan, either like it or lump it, you won’t change it