Hey, you and me need to discuss this. Your wealth and your children’s wealth depends on it whether we like or not.
Have you seen the movie, Looper?
It’s a movie about time travel 50 years from now. One of the main characters travels back from the future to tell his younger self to learn Chinese, it’s the language of the future.
Whilst I reckon it would be handy, I’m not doing it. But I am watching closely as to what is going on in the Far East (or North from our perspective), so lets move on…
Remember this…. ‘America sneezes and Australia catches a cold’?
Now it’s more like, ‘China farts and Australia craps its daks!’
That’s exactly what happened last year. It looked for a while like China’s growth might fall below 7 percent. That’s not a bad rate of growth. But if you’re trying to pull a billion people out of poverty within a generation, it’s not enough.
And it’s not enough to support China’s monstrous demand for commodities. The World Bank estimates that China currently consumes 45 percent of all metals produced globally.
So if one country is consuming almost half of the global metals market, even the slightest tremor is going to send shockwaves across the world.
And with the resources sector almost single-handedly propping up the Australian economy, it caused a bit of panic here. “The boom is over! The sky is falling!”
The RBA cut rates twice in quick succession, just to cover our assets.
In the end, China got back on track, and all the data so far this year are helping mining executives across the country sleep a little better.
So what happened?
Basically, China was trying to pull off an incredibly tricky acrobatic rebalancing act. They just didn’t quite nail the landing.
During the GFC, China cuts rates aggressively to try and insulate itself from the fall-out. In concert with sustained government spending, the rate cuts worked, and the Chinese economy crashed through the worst of it.
Trouble was, interest rates got stuck on a high-speed setting. And with interest rates at bargain basement levels, money started gushing towards the property sector. The Chinese leadership started to worry about an emerging blossoming bubble in real estate.
(Sound familiar? This is just what some people are worrying is happening right here right now in Australia. )
And so Beijing started looking for ways to take some heat out of the economy – to rebalance growth away from the property bubbles, exports and infrastructure investment, and towards private investment and consumption. Their strategy was to let the economy cool down a little. To bring growth back down to around 7 percent, from decade averages of over 8 percent.
The Chinese leadership went out and let it be known that they’d be happy with these more “balanced” rates of growth. In the words of Vice-Premier Li Keqiang:
“It is hard to maintain double-digit growth, but 7 percent will be enough to achieve an affluent society by 2020. We have benefited from reform in the past 30 years… We have to march on as there is no way back.”
The Chinese government still cut interest rates and banks’ reserve requirement ratio twice last year. But given what was playing out on the international stage, this was seen as conservative.
However, in the third quarter of last year, a string of soft data releases gave rise to the fear that China had undershot the mark, and was running dangerously close to stalling.
Hit the panic button.
But China was never going to let it happen.
Can you imagine how hard it must be administering a nation of 1.3 billion people? It makes what’s goes on in Canberra look like the squabbles of an outer-suburban council.
And can you imagine what an angry mob of 1.3 billion looks like. It’s a scary thought. There’s some very strong incentives to make sure the climb out of poverty continues. And quickly too.
But China has one big thing going for it – it’s stage of development.
China is around where Japan and Taiwan found themselves about 50 years ago. There’s has been an incredibly rapid pace of urbanisation over the past 20 years in China, but still 53 percent of the Chinese population live in rural areas.
And there are estimates that moving every 200 million farmers to urban areas boosts GDP by 0.8 percentage points. That gives the Chinese a powerful lever to lean on.
Similarly with investment. In a transition economy like China’s, it is easy to find productive areas to invest in – areas that expand productive capacity in the long run.
And so China knows that if it needs government spending to give GDP a boost, it can also fall back on infrastructure investment. And it can trust that, (9 times out of 10!) it’s not building some massive white elephant.
In this way, China’s stage of development affords Chinese officials with degrees of freedom not available to more advanced economies.
And you can be sure that the incoming Chinese leadership team will be doing everything it can to keep the party going.
In November 2012, the CCP completed a sweeping transfer of power with the new General Secretary, Xi Jinping and the new Prime Minister, Li Keqiang coming to the helm. While this transfer is not technically official until the annual session in March 2013 of China’s parliament, for all intents and purposes, this new leadership is in place.
And they will be keen to stamp their mark, and show the Chinese people that the economy is in good hands. Some forecasters are predicting that fixed-asset investments in infrastructure, including roads, bridges and housing, could surge to 20 percent this year, from 16 percent in 2012.
China will need to follow the classic development model at some point – moving away from a reliance on investment and exports, to a greater contribution from domestic consumption. But in the mean time, over the next ten years at least, China can rely on massive investment to drive things along.
A recent Fitch Ratings report shows investment (both public and private) reached a new record of 45.6 percent of GDP in 2011. No country in history has known anything like it – not even Japan, Taiwan or South Korea.
This obviously has very bullish implications for Australia and the Australian resources sector.
There will be ebbs and flows in demand for commodities, but there will be a fundamental level of unshakable demand.
The bottom line…
With the world awash with money thanks to the central banks and the China phenomenon, this year is a great year to build wealth and accumulate assets like crazy.
Well, that’s what I’m doing right now…
What about you?