China - The Big Questions
China's "hard or soft" landing seems to be one of the three items that are worrying macro strategists (the others are the Eurozone crisis and the US economy). This is an old story - since 2000 there has been a narrative whereby China starts trying to boost its economy, runs into inflation, slams on the brakes, and the resultant fall in commodity demand has negative knock-on effects for commodity prices and exporters.
I'm not a China expert, although my father was. Sadly, I was not smart enough to tap my father's massive knowledge of Chinese history when I had the chance, so I've had to make up the deficit on my own time, while focussing on other markets. Fortunately China has been very important for my core field, and also there are plenty of excellent commentators like Jonathon Anderson, Michael Pettis, or Patrick Chovanec. (For the last two, see the side links). I think I have a fairly good handle on how China policy (or more importantly, perceptions of China policy) affect GEM sentiment.
And the fact is that there's a perception that if China does hit the brakes, then other markets will slam into a wall. China is seen as the engine of growth and demand for South East Asia, and as a core market for the commodities of Latin America and Russia. Because the rest of the world is not looking too hopeful right now. The US is coming out of a recession - just - with GDP growth at just 2.5% (less than 2% is a recession), and with some signs of consumer confidence returning. However, Congress is going to spend the rest of the year making cuts in spending, and this austerity may be too much for the fragile recovery. The next President will have to either raise taxes or cut spending. Europe is also heading into austerity, as the aftermath of the Euro crisis means that governments cut spending, and banks cut lending.
So China is important. I want to argue though, that even if they do tighten, this is not going to be a disaster for the rest of the EM world, and certainly not for China. First, do yourself a favour and read this excellent article by Michael Pettis. For me, the most interesting idea of the article is that higher interest rates could actually be expansionary, as it will increase the income on savings, leading consumers to spend more (but there's a lot more than just that).And it need not reduce the spending on infrastructure, as much of this is government-mandated (and therefore not interest sensitive) and in any case interest rates are low, and companies have cash.
So don't assume that if the Chinese raise rates, this will necessarily lead to a crash in steel prices, or copper prices, or Chinese growth in general. The bottom line is that China will urbanise, one way or another. It has a crazily ambitious five-year plan, which can probably be taken with a pinch of salt, like most government promises but the secular growth direction is still there.
In the next 5 years, according to the UN population
survey, China will add another 78 million urban population and India will add
another 56 million, just under 27 million per year, a Tokyo, two New Yorks, or
four Londons.
The bottom line is that markets are going to be choppy given that perceptions of China fiscal and monetary policy will change. Your job as an emerging markets investor is to see through that and keep your eyes fixed on the longer term horizon, and the fact that China offers real growth because of the massive urbanisation that will definitely happen, at a time when the major economies of the world are looking lacklustre because much of their best growth is behind them.
China's "hard or soft" landing seems to be one of the three items that are worrying macro strategists (the others are the Eurozone crisis and the US economy). This is an old story - since 2000 there has been a narrative whereby China starts trying to boost its economy, runs into inflation, slams on the brakes, and the resultant fall in commodity demand has negative knock-on effects for commodity prices and exporters.
I'm not a China expert, although my father was. Sadly, I was not smart enough to tap my father's massive knowledge of Chinese history when I had the chance, so I've had to make up the deficit on my own time, while focussing on other markets. Fortunately China has been very important for my core field, and also there are plenty of excellent commentators like Jonathon Anderson, Michael Pettis, or Patrick Chovanec. (For the last two, see the side links). I think I have a fairly good handle on how China policy (or more importantly, perceptions of China policy) affect GEM sentiment.
And the fact is that there's a perception that if China does hit the brakes, then other markets will slam into a wall. China is seen as the engine of growth and demand for South East Asia, and as a core market for the commodities of Latin America and Russia. Because the rest of the world is not looking too hopeful right now. The US is coming out of a recession - just - with GDP growth at just 2.5% (less than 2% is a recession), and with some signs of consumer confidence returning. However, Congress is going to spend the rest of the year making cuts in spending, and this austerity may be too much for the fragile recovery. The next President will have to either raise taxes or cut spending. Europe is also heading into austerity, as the aftermath of the Euro crisis means that governments cut spending, and banks cut lending.
So China is important. I want to argue though, that even if they do tighten, this is not going to be a disaster for the rest of the EM world, and certainly not for China. First, do yourself a favour and read this excellent article by Michael Pettis. For me, the most interesting idea of the article is that higher interest rates could actually be expansionary, as it will increase the income on savings, leading consumers to spend more (but there's a lot more than just that).And it need not reduce the spending on infrastructure, as much of this is government-mandated (and therefore not interest sensitive) and in any case interest rates are low, and companies have cash.
So don't assume that if the Chinese raise rates, this will necessarily lead to a crash in steel prices, or copper prices, or Chinese growth in general. The bottom line is that China will urbanise, one way or another. It has a crazily ambitious five-year plan, which can probably be taken with a pinch of salt, like most government promises but the secular growth direction is still there.
10
million Chinese and 5 million Indians will be moving from the countryside to
the town every year for the foreseeable future. This
is the difference between Brazil and Russia on the one hand, and India and
China on the other. Russia did its urbanization in the postwar period, as did
Brazil.
Country
|
2010
Urbanization
|
Brazil
|
86.5%
|
Russia
|
73.2%
|
India
|
30.0%
|
China
|
47.0%
|
The bottom line is that markets are going to be choppy given that perceptions of China fiscal and monetary policy will change. Your job as an emerging markets investor is to see through that and keep your eyes fixed on the longer term horizon, and the fact that China offers real growth because of the massive urbanisation that will definitely happen, at a time when the major economies of the world are looking lacklustre because much of their best growth is behind them.
No comments:
Post a Comment