Thursday, June 30, 2011

China's Struggle to Shift to Consumption Economy

China’s stunning expansion has been funded by banks that do not fail and an all out effort to bring as much infrastructure to as many people as possible.  A lot of the debt repayment is predicated on the idea that the asset involved will access a much larger economy in a couple of years.  It has worked and it may still work, although that is now becoming less and less believable.

They have drawn in the entire working population to this process and that part of the economy can no longer grow.  They must now transition to rising productivity and rising consumption.  The fastest way to do that is to allow rising wages to drive consumption.  In the meantime it is necessary to restructure the banking system into a profit making system that supports consumption.

Certainly it is becoming rather difficult to sell into the global market which may well be contracting and certainly could.

China is trying to shift from infrastructure investment to consumption driven economy

JUNE 17, 2011

The rmb has actually risen by all of 5 percent against the dollar over the last year--doesn’t get the job done, because the dollar’s gone down against other currencies and there’s been virtually no change in the trade-weighted strength of the rmb. The countries we identify as being overvalued include some of those already at that time: Brazil in particular, Turkey, South Africa. And the countries undervalued as I say include the same suspects: Hong Kong, Malaysia, Singapore, Taiwan in addition to China, also to some extent Sweden and Switzerland. The authors' calculations show the need for a slightly larger effective revaluation of the Chinese currency, the renminbi, this year (17.6 percent) than last (15.3 percent) and a larger appreciation of the renminbi in terms of the dollar (28.5 percent rather than 24.2 percent). 

Five charts of China’s growth conundrum

Posted on 17 June 2011

When you think about it, the imminent spike in mining related investment and its impact on Australian GDP is a pretty fair reflection of what has been going on in China for some time. Martin Wolf recently opined on the sustainability of China’s GDP growth without the government sanctioned infrastructure binge (here). It’s the Jim Chanos view of the world, ease off the building and things don’t just slow, they go into reverse pretty quickly. The following charts hint at what’s at stake:
1) The importance of infrastructure investment (Gross fixed capital formation) in driving China’s GDP growth over the last decade is self-evident:

2) And even more simply stated as a proportion of GDP:

3) So it is clear just how difficult is the task is to migrate the driver of GDP growth from investment to consumption.

4) Still that is why China is forecasting GDP growth closer to 7% for the next 5 years – it’ll be weaning the economy off the debt financed infrastructure spend ever so gradually:

5) But the risk is that the problems have already been conceived – China’s financial system is pregnant with debt that has financed investments that will prove uneconomic if the rate of GDP growth (and the attendant asset price inflation) slows.

Looked at from this perspective, it has remarkable similarities to the debt overhang that persists in the developed world – and the resulting underperformance of financial equities from New York to London and beyond.

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