China está en desaceleración (ayer te mandé las previsiones del FMI que le bajan el crecimiento del PIB del 9,2% en 2011 al 8% en 2012 para volver a subir al 8,5% en 2013) , pero no tiene pinta de ser grave y si fuera mayor, habría estímulos presupuestarios adicionales. Sus tres problemas mayores se van corrigiendo:
· Burbuja de inmuebles: se tomaron medidas para frenarla y se está consiguiendo.
· Inflación: ya anda por el 2,2%, lejos de los altos de años atrás.
· Burbuja de crédito: se frenó hace muchos trimestres.
Y tienen mucha capacidad para corregir la menor pujanza externa: se centran en el consumo interno y estimularán con descensos del coeficiente de caja, bajada de tipos de interés e inversiones en infraestructuras… Pero ojo, la prensa occidental no se entera de casi nada de lo que pasa por ahí… Filtra con lupa todo lo que leas de China que hay muchos intereses contrarios a ese país…
China, beyond the hard/soft landing debate
Imagine a country where a sector has dominated that nation's economy and is deemed to be "systemically important" to growth. Insiders of that sector have made obscene profits from the growth. One day, we wake up and find that that sector has gotten in over the heads. The "logical" free-market solution is the let that sector go down and allow the economy to re-balance, but sector insiders have a cozy relationship with the government. If leading companies in that sector goes down, the collapse will surely take many in government down with them. What country am I referring to? What sector? What is the most likely course of action for the government?
One obvious answer to the first two questions is the finance sector in the West (see my last post Another test of the banking lobby's powers). It's a good guess, but I am referring to State Owned Enterprises (SOEs) in China.
The roots of China's growth
The China miracle was fueled mainly by two factors:
- Access to a cheap source of labor and the willingness to use it as a source of competitive advantage to grow the economy; and
- The CNYUSD currency peg.
While the currency peg allowed Chinese labor to be highly competitive, it also created all sorts of nasty side effects. First and foremost, China was stuck with America's monetary policy, which was inappropriate for China. As the Chinese economy heated up and inflation rose, Chinese interest rates could not rise with inflation and inflationary expectations because of the currency peg. Thus, real interest rates went negative.
Negative real interest rates created winners and losers. The winners were the companies with easy access to capital, which were mostly the SOEs at the expense of private businesses, which are often referred to as Small and Medium Enterprises (SMEs). An academic paper called A Model of China’s State Capitalism (h/t Michael Pettis) that shows that the dominance of SOEs and their superior growth is largely attributable to their monopolistic or semi-monopolistic positions in the Chinese economy, e.g. telecom, oil refining. etc. John Hempton called this arrangement a kleptocracy because Party insiders have become enormously wealthy at the expense of the ordinary citizen.
Negative interest rates also meant very low or negative cost of capital. As Japanese companies found out in the late 1980's, it's easy to make money when your cost of capital is that low. You borrow as much as you can and invest in something, anything with a positive real return. If you are positioned properly, you can make obscene profits - and they did.
Currency peg = Financial repression
The biggest loser in China, on a relative basis, was the household sector. The ordinary Chinese who worked hard and managed to squirrel away savings had few places to put their money other than the banking system. The Chinese bond market is not sufficiently large. The stock market is very small and undeveloped compared to major industrialized countries and is regarded mostly as a casino. The household sector was forced to put money into the banking system at negative interest rates. Carmen Reinhart calls that financial repression. Here is the definition from Wikipedia:
Reinhart and Sbrancia characterise financial repression as consisting of the following key elements:
1.Explicit or indirect capping of, or control over, interest rates, such as on government debt and deposit rates (e.g., Regulation Q).
2.Government ownership or control of domestic banks and financial institutions with simultaneous placing of barriers before other institutions seeking to enter the market.
3.Creation or maintenance of a captive domestic market for government debt, achieved by requiring domestic banks to hold government debt via reserve requirements, or by prohibiting or disincentivising alternative options that institutions might otherwise prefer.
4.Government restrictions on the transfer of assets abroad through the imposition of capital controls.
John Hempton at Bronte Capital outlined the dilemma of the Chinese household well:
The Chinese lower income and middle class people have extremely limited savings options. There are capital controls and they cannot take their money out of the country. So they can't invest in any foreign assets.
Their local share market is unbelievably corrupt. I have looked at many Chinese stocks listed in Shanghai and corruption levels are similar to Chinese stocks listed in New York. Expect fraud.
What Chinese are left with is bank deposits, life insurance accounts and (maybe) apartments.
For those ordinary Chinese citizens who could afford it, the only logical place for savings is in real estate. Real estate became a form of money and savings poured into it. In effect, the CNYUSD peg was indirectly responsible for China's property boom.
Where we are today
Fast forward to today. China's growth has hit a slow patch. One of the objectives in the Party's latest five-year plan calls for a re-balancing of growth away from heavy infrastructure spending, which has benefited SOEs, to the consumer (read: household sector). Andy Xie described the slowdown and how the authorities have managed to contain the worst effects of the downturn:
There are no widespread bankruptcies. The main reason for this is government-owned banks not foreclosing on delinquent businesses. Of course, banks may have more bad assets down the road, which is the cost for achieving a soft landing.
SOEs, the vehicle of wealthy Party insiders, have been hit hard:
State-owned enterprises (SOEs) reported 4.6% net profit margin on sales and 7.4% return on net asset in 2011. Both are very low by international standards. In the first five months of 2012, SOEs reported a 10.4% decline in profits but 11.3% increase in sales.
SOE performance indicators are low and declining. This is despite the fact that SOEs have such favorable access to financing and monopolistic market positions.
Xie also echoed Hempton's kleptocracy claims, though in a less dramatic fashion:
Closer observation gives clues as to why SOEs are so inefficient. Their fixed investment often costs 20% to 30% more than that for private companies and take about 50% longer to complete. The leakage through overpriced procurement and outsourcing and underpriced sales is enormous. SOE leakage can explain much of the anomalies in China.
In addition to the problems presented by slowing growth, the financial system is teetering because of an over-expansion of the shadow banking system (see my previous comment Ominous signs from China). Left unchecked, it could have the potential for a crash landing, i.e. negative GDP growth, which is not in anybody's spreadsheet model.
What will the government do?
In the face of the cracks exposed by a slowing economy, what should the Chinese authorities do?
The textbook answer is that growth has been overly unbalanced towards large infrastructure projects and tilt growth toward the household and consumer sector. The Chinese consumer needs to rise. The latest five-year plan specifies this objective in a clear fashion.
The problem with that solution is that it gores the SOE and Party insiders' ox. For the household sector to rise, household income needs to rise. Wages need to rise. Returns to household savings need to rise. For this to happen, financial repression needs to end.
Ending financial repression would mean that real interest rates would need to rise, which would squeeze the cost of capital of Chinese enterprises - SOEs in particular. Would the Party cadres go along with that? This may be a case of where the leadership dictates a course of action but the bureacracy doesn't go along.
The good news: A soft landing
Under the circumstances, the most likely course of action is a "more of the same" stimulus program. Already, we have seen a surprise rate cut, which does nothing for the returns of the household sector. We are likely to see more infrastructure stimulus. Already, we have seeing signs of a growth revival and signs of real estate revival.
The good news is that such a policy course will mean a soft landing in China. The bad news is that it will mean more unbalanced growth and it just kicks the can down the road. The next time the economy turns down, it will be that much harder to revive.
Bad news: End of the commodity supercycle
What's more, such a growth path would mean the end of the commodity supercycle. The principal argument for being long-term bullish on commodities (which I have made before here) is rising household income in emerging market economies like China's mean rising resource intensity. Greater household income mean that consumers want more stuff, e.g. cars, TVs, etc. This is shown by this analysis from the Council on Foreign Relations.
If financial repression continues and the household sector continues to get repressed, then where is consumer demand coming from? Moreover, there are indications (via FT Alphaville) that resource intensity may not rise despite greater infrastructure spending:
Nomura analysts Matthew Cross and Ivan Lee looked at China’s urbanisation rate and concluded that it can keep progressing at its current pace for years without needing an increased rate of steel consumption. In fact, they argue that China’s annual steel needs won’t increase at all in 2012 and 2013 — and that’s with new government stimulus.
Also see this chart (via FT Alphaville):
This is where I depart from commodity bulls like Jeremy Grantham. Even long-time commodity bull Jim Rogers has become more cautious on China.
More importantly, while the world focuses on the China hard vs. soft landing debate, I am thinking about the longer path for Chinese growth. They will slow down. When the next downturn hits, we could see a classic negative GDP growth recession.
Un abrazo,
PD1: China deja de lado a Europa y se centra en Africa:
China Gives Up On Europe, Will Target Africa Instead
That China has finally given up on Europe is no news (granted, however, it will make it more complicated for various European newspaper to make up articles alleging China will bail out Europe now that this is no longer the case): after all even the Norwegian sovereign wealth fund has finally learned its lesson, and having been burned enough times, has made it quite clear it will have nothing to do with Europe's insolvent periphery. China, which has already lost enough money on Europe, has now decided to do the same. From Bloomberg: "China Investment Corp. has stopped buying European government debt because of an economic crisis on the continent, though it continues to look for new investments there, said CIC President Gao Xiqing. “What is happening in Europe right now is of course of concern,” Gao said yesterday in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.” Sorry Europe: you had your chance. As for where China will invest its capital in the future? Why the one continent so far untouched by globalization, and which has the most debt capacity of all...
Yes, Africa:
The Chinese sovereign wealth fund would “love” to boost investments in Africa, Gao said. The company is limited in how much it can invest in Africa because the projects are not large enough to fit its investment criteria, he said.
The fund is boosting investments outside of China as it seeks to increase returns on the nation’s foreign currency reserves and secure commodity supplies. The Chinese government injected about $50 billion this year in the sovereign wealth fund, Gao said. The government has not made a decision on whether to regularly inject capital into the company, he said.
“Right now, we are busy enough, so we don’t worry terribly about recapitalization,” he said. “In the long run, we should do something about it.”
And where the big money is heading, Goldman can't be far behind. Sure enough, as recently as a month ago, the firm released the following 32 page mangum opus setting the stage for the Second Congress of Berlin:
In the early 1990s, few European or American companies would have been quizzed on their strategies for China or Asia. Now it's often the first item on the agenda. Our investigation in this edition is into Africa, and it might provoke déjà vu: is now the time for multi-nationals to be investing in Africa? In short, our conclusion is yes. Africa's exceptionally robust growth over the last decade is probably understated (informal parts of economies are very big), but not being able to measure this growth precisely shouldn't detract from Africa?s potential, which is about much more than resources as it evolves and climbs the consumption, urbanisation and perhaps industrialisation curves that the BRICs have climbed. We believe meaningful opportunities for western consumer companies exist as Africa?s household consumption grow s rapidly (it is already greater than some of the BRICs) and that failure to invest now will see others rush in. Capital flows and trade flows into Africa are a microcosm of the changing world, with the BRICs already there, notably in commodities. We have interviews with investors and Standard Bank and Tiger Brands that paint a picture of rapid and misunderstood change, and pieces from our consumer staples, mining and insurance analysts that reinforce this
Now all that remains is for Jim O'Neill to replace BRICS with SCRAMBLE (Sudan, Congo, Rwanda, Algeria, Mali, Botswana, Libya and Ethiopia) and the next great resource grab arena will be all too clear.
Because make no mistake: this is all about resources. Europe has none left, nor does it have any assets anymore. Which means it is time for a new playground, lots of new debt and debt slaves, and in 20 years: another continent stripped of everything valuable but at least with 200% debt/GDP as far as the eye can see..
Full must read report on Africa from Goldman Sachs: http://www.scribd.com/doc/93105802/GS-Africa
PD2: Se complica todo en las finanzas. Antes era simple, pero ahora entre colaterales y otras puñetas, se le da a todo miles de vueltas, cuando al final, lo simple funcionaba mejor… Esta ingeniería financiera de alto standig, siendo promotor de la misma no sólo los bancos de inversión, sino los bancos centrales y Tesoros Públicos y Gobiernos, que les encantan los “cocos”…, la van a acabar liando parda…
Sí, todo el mundo comisiona un cacho por emitir, colocar, garantizar, dar rating y su puta madre, pero qué barbaridad, para cubrirse las espaldas la cantidad de currelo que tienen que hacer…, para que luego venga Grecia y haga una quita y descomponga todo este tinglado… Memos…
PD3: Ya sabes que si hay problemas, el que salva a los países de las triquiñuelas de sus actores bancarios son las reservas de divisas que se tengan… Los fuertes ya sabes quienes son, los que tienen más fuerte su balanza externa, los países asiáticos:
PD4: España no es Irlanda, aunque nos pese, ni Uganda tampoco…
PD5: Being happy, that's the main thing I'm trying to help with. If you're happy, not much else matters in life, at least in my experience. There's various ways to be happy, of course. I'm trying to tell people the things that I have learned.
I'm trying to teach them to be curious, independent. It's very hard to think independently, as you probably know. Extremely hard. Most people are not very curious, If they see it on TV, that's what they accept instead of thinking, what's really going on here? I'm teaching readers to be curious, skeptical, independent thinkers. (Jim Rogers)
