International | Jan 23 2007
By Greg Peel
Much was written towards the end of 2006 that suggested government moves to rein in China’s continuing growth explosion to slightly more manageable levels would see growth fall from its 10% level of the last four years to more like 8%. Hardly a significant turnaround, but better than a blow-off top.
The result of such a contraction, accompanied with a slowdown in the US and other global centres, would ensure some relief in commodity prices and hopefully thus inflation, the pundits argued.
Well commodity prices have been doing their bit, yet there is no evidence yet of anything much different going on in China. The big surprise for many was the sudden fall in the oil price, triggered, in theory, by a warm US winter. It goes to show China is not the only global driver. The weather factor added momentum to what was otherwise a general commodity price pullback based on clear evidence of US economic slowing (but not collapse).
The analysts at GaveKal Research cannot find any reason to believe China will achieve any sort of forced easing of the economy in 2007. They are tipping a fifth straight year of 10% GDP growth. The government will tweak around the edges, but achieve little of consequence.
GaveKal further sees fixed asset investment rising by 20-25%, exports and imports both rising by 20%, and loans by 15%. Consumer price inflation will be around 2% and the trade surplus will increase from US$180bn to US$240bn. Corporate profits will continue to grow and may yet receive a boost from lower oil and commodity prices. This is “sustainable” growth, says GaveKal, with lack of domestic consumption growth being the only real concern. However, consumption growth is more of a five year story, the analysts suggest.
Such growth accompanied by such insignificant inflation is a bit of a dream scenario, but how long can it last? GaveKal suggests there will be no change in at least the next 18 months, as productivity is continuing to grow faster than wages. Eventually the new worker flow will begin to recede, and some sort of rural/urban equilibrium will be reached. At that point wage inflation will begin to emerge. However, that is not likely for a while. 2011?
Alternatively, the US or Europe could become protectionist, putting a big hole in China’s external demand. This would lead to a deflationary environment, as domestic consumption has yet to grow substantially. It’s hard to see protectionist policies in the US while the Democrats control Congress. It’s a whole year till we know which party will take the US forward.
The Chinese government will continue in its process of quietly raising interest rates and quietly revaluing the renminbi, GaveKal suggests, as part of the stimulus package for domestic consumption. Nothing spectacular will occur before 2008.
However, the Shanghai A-share index may well be spectacular, with GaveKal tipping a yearly return of 50%. This sounds all very exciting, until you realise that (a) it was up 130% last year (b) foreigners can’t buy A-shares and (c) A-shares can trade up to three times the value of the Hong Kong-listed H-share equivalents that foreigners can buy.
The big question for most is what will happen to China’s seemingly insatiable demand for the world’s commodities. GaveKal analysts do not pretend to be commodities experts, but suggest that their 10% growth forecast implies continuing commodity demand, albeit with the now standard level of volatility derived from the frantic stocking/destocking cycles that carry on from month to month.
As far is oil is concerned, China’s crude oil imports have shown annual growth levels of 30%, 3% and 15% over the last three years. Not much of a pattern there. (The car is the big potential influence, particularly as domestic consumption initiatives are implemented, and environmental concerns are not responded to quickly).
One thing GaveKal does warn of is the capacity for Chinese commodity substitution. As an example, the Chinese are working small iron ore mines with less than 20% iron content (BHP would want 60%) and bringing it to market at the same price as the ore landed from Brazil.
And if you are looking for an alternative for Sydney’s ridiculous property prices, GaveKal sees Chinese real estate remaining a very bullish prospect.
