I have been hearing the argument that China will pull the world out of this recession so many times that I
can't hear it any more.
I decided to take a closer look and
what did I find?
Forget it!
The Chinese economy is expected to grow
about 8% this year, which is remarkable at first glance, especially
as their exports are down about 20% overall this year.
How is that possible?
When in comparison, Germany the other
major export driven economy, GDP is down 6.9% year on year in the
first quarter on a decrease of 17.5% in exports.
The difference is mainly due to
economic stimulus in the form of credit.
Exploding loan growth is bound to
exponentially increase the already large problem-loan portfolios, at
2% of total asset, of the banks.
With the US consumer unlikely to return
to anywhere near the level of consumption in 2006 soon you have to
ask yourself where all the new lending is going into.
It has been used for infrastructure but
also to speculate and that is where the problem lies.
Here is where the lending has been
going:
-
Chinese equity and real estate
markets
-
Chinese initial public offerings
-
Commodities
-
Investments in companies around
the world
So this is the reason the Chinese
economy is booming. Massive bank lending with all the investment
being inside China thus growing the Chinese economy but not helping
the rest of the world.
Even though imports have increased year
on year from -43.1% in January 2009 to -13.2% in June imports have
mainly been in the form of commodities and mainly from Asia. That
means no increased demand in products from Europe and the USA.
Furthermore,
as Vitaliy Katsenelson mentions in his excellent article The
China Bubble’s Coming — But Not the One You Think,
it is unclear how long the the Chinese economy can go on growing at
the current rate without a recovery from the rest of the world
substantially increasing Chinese exports.
“But as we’ve recently learned,
you can defy the laws of financial gravity for only so long. Put
simply, mean reversion is a bitch. And the longer excesses persist,
the harder the financial gravity will bring China’s economy back to
Earth.”
In summary
-
The growth in the Chinese economy
is not helping the rest of the world as, apart from commodities,
Chinese imports are not rising
-
China is stimulating mainly its
own economy to bridge the period until demand from the rest of the
world recovers
-
The stimulation is working in
terms of Chinese GDP growth but it is also leading to bubbles in
Chinese real estate the Chinese stock market and commodity prices
If the rest of the rest of the world
does not recover soon, which seems unlikely with a world wide banking
crisis and overstretched US consumers (the spender of last resort)
not spending due to unemployment or paying down debt, China will have
substantial problems. With non performing bank loans increasing along
with falling property, stock and commodity prices.
“Unlike most, I have been a
steadfast optimist on China. Yet I am starting to worry. A macro
strategy that exacerbates already worrying imbalances is ultimately a
recipe for failure. In many respects, that’s what the global crisis
and recession of 2008-09 are all about. China will not get special
dispensation from the most critical lesson of this post-crisis era.”
So China is not going to save the world
economy. The rest of the world will have to save itself which will be
a long drawn out process.
This involves continually
recapitalising banks as they write off credit card and commercial
property loans.
Consumers paying down debt in the US
and UK probably with lower paying jobs.
For the reasons above I do not trust
the substantial rally since March this year.
I think we will have
another substantial decline as the economy is not going to recover
quickly as so many market forecasters are predicting.
Holding cash is boring and I am itching
to do something but until the markets offer attractive priced assets
I am waiting on the sidelines
