Another good article from Richard Duncan.
It seems that the commodity boom will be ending soon as the world economy growth slows down. i think the economic equation is as follows:
Supplier =================> China ===============> US/Europe
Supplier 1 = Advanced economy (Japan, German, US, Korea) that produce machines and tools to be install in China for production capacity
Supplier 2 = Supplier to Supplier 1, mostly emerging economy (Malaysia, Thailand, Indo, Taiwan) supplier semi finished goods to Supplier1
Supplier 3 = Natural resources and commodities suppliers to China for production.
China - the enormous amount of goods are produced in China for the last 20 years. Most of them were consumed by US and Europe due to the strong currencies and high purchasing power. In another word, US and Europe has high credit rating to borrow to spend. But the borrowing capacity has hit the sky or rather the moon. This era is declining rapidly.
US/Europe - it is known facts that these two region is in deep trouble. As the demand for China goods reduce, China will reduce the products and services from Suppliers 1,2 and 3. As a results the wealthy effected generated for the last 20 years will subside.
Repercussion - Price real estates and other forms of real investments will be peaked.
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Posted on: Friday, June 15, 2012|Written by: Richard Duncan
The structure of the Chinese economy is very different from
that of the US economy. China’s economy is dominated by and driven by
investment. The US economy is dominated by and driven by consumption. As I
outlined in Economic Forecasting, 101
(February 15, 2012), the economy of every country is comprised of just four
major parts: personal consumption expenditure (how much people spend), business
investment, net trade (exports – imports) and government spending. The
following table shows the composition of the US economy and the Chinese
economy:
The breakdown of the US economy is fairly representative of
all developed economies (although a bit heavier on consumption than the
average). China’s economy is unique in being so heavily weighted toward
investment. The key to China’s rapid economic growth over the last two decades
has been its surging trade surplus with the United States, which rose from $10
billion in 1990 to $268 billion in 2008. China’s overall trade surplus with the
world, shown as “net trade” in the table above was equivalent to 4% of China’s
GDP last year. While 4% is not an insignificant number, it would not seem to be
large enough to justify my claim that this has been the driver of China’s rapid
economic growth; and taken by itself, it would not be.There is much more to it
than that, however.
Consider first that there are millions (if not tens of
millions) of Chinese factory workers employed in factories making goods to sell
to the United States. Those workers are paid a wage. They consume with that
wage. That spending boosts China’s economy and appears as “consumption” in
China’s GDP statistics.
Next, hundreds of billions of dollars have been invested to
build factories in China each year. Many (most?) of those factories make things
to sell to the US. That investment boosts China’s economy and is recorded as a
business investment in China’s GDP statistics.
Finally, when Chinese exporters bring back the dollars they
earn from selling their goods in the United States, they convert them into the
Chinese currency, the Yuan, and deposit them in Chinese banks. This causes very
rapid deposit growth, which, in turn, forces the banks to have very rapid loan
growth (because the banks must earn interest on the loans to be able to pay
interest on the deposits). In that way, the rapid loan growth creates very
rapid economic growth.
Therefore, in my assessment, as much as 40% of China’s
economy is directly dependent on China’s trade surplus with the United States.
Now that the US is in crisis, that trade surplus is not going to continue
skyrocketing as it has since 1990. It is going to flatten out; and that will
create a much more difficult economic environment for China during the years
ahead.
China’s industrial output has expanded by more than 15% a
year for two decades. Now, given rapidly slowing export growth, the end of the
property construction boom, and following a 60% increase in total bank loans
during 2009 and 2010, China has massive excess capacity across almost all its
major industries. Therefore, there is little reason for it to invest and create
even more excess industrial capacity.
The US is in crisis, so the overly indebted Americans can’t
continue buying more Chinese goods. Chinese factory workers don’t earn enough
to buy what they make in the factories where they work. In fact, roughly 80% of
the people in China earn less than $10 per day. Therefore the Chinese can’t
afford to buy any more Chinese goods. So, who will?
If China continues to invest and expand its industrial
production at 15% a year as in years past, then in three years from now, China
will have 50% more industrial production capacity than it does today. That
won’t work. China already has too much capacity. The Americans are no longer
able to borrow more and buy it all; and the Chinese don’t earn enough to buy it
themselves. This all means that the era of rapidly expanding economic growth –
driven by investment and exporting – is coming to an end for China.
Economic booms tend to be followed by economic busts; and
big booms tend to be followed by big busts. Thailand’s boom ended in 1997. In
1998, its economy shrank by 10%. Such a severe economic outcome cannot be ruled
out for China in the near future. However, given the firm control that China’s
leaders have over the economy and the political system, such a severe outcome
will probably be avoided. China’s leaders are likely to respond to the crisis
in China’s export-led, investment-driven economic model in the same way that
the Japanese government did when Japan’s great economic bubble popped in 1990;
that is through massive fiscal stimulus financed by government borrowing. When
Japan’s bubble popped, the Japanese government borrowed and spent and, in that
way, prevented Japan’s economy from collapsing into a depression. As a result,
Japanese government debt rose from 60% of GDP in 1990 to 240% now.
China is very likely to follow this Japanese model of
post-bubble depression prevention – just as the United States has been doing
since its property bubble popped in 2008. And, if China’s government borrows
and spends aggressively enough, taking Chinese government debt up to 100% or
even 200% of China’s GDP over the next decade, China’s economy is unlikely to
contract sharply in the way that Thailand’s did in 1998. In fact, it may even
continue to expand. It won’t expand at 10% a year as it has over the past 20
years. Nor will it expand at 7.5% a year as the consensus now expects. It may
expand by an average of 3% a year over the next ten years, but such a positive
outcome is by no means guaranteed. Considerably worse scenarios are also
possible.
The very rapid slowdown in China’s economic growth has come
as a severe shock to the financial markets. Most economic prognosticators had
extrapolated the high rates of Chinese economic growth into the distant future
and concluded that China would become the new engine of economic growth for the
world. That conclusion has suddenly been called into question by the facts.
During April, China’s imports did not increase relative to the same month in
2011. That means China contributed nothing to the economic growth of the rest
of the world during that month. This new reality, a world in which China is not
importing more each month, has profound implications for the global economy.
It will mean that China will import far fewer raw materials
than previously anticipated. That will put significant downward pressure on
most commodity prices, everything from oil to copper to cotton. Lower commodity
prices will mean significantly less economic growth in the commodity producing
countries such as Australia, Brazil and Indonesia; and slower economic growth there
will put downward pressure on their currencies. The countries that export
precision machine tools to China – such as Germany, Japan and South Korea –
will also be hit by the sudden slowdown of Chinese growth. And, as those
countries that benefit from exporting to China get hit, they will buy less from
their trading partners, so the contagion will spread throughout the world
causing trade volumes to decline.
Finally, the property markets in Hong Kong, Singapore,
Vancouver, Sydney and Melbourne, which have been bid up by Chinese
millionaires, are likely to begin to fall as that source of money dries up.
China’s growth has been derived from its trade surplus with
the United States, which was financed by rapidly increasing US indebtedness.
That game is up. The world is in shock. Adjustment to this new reality could be
swift and savage.
Posted on: Friday, June 15, 2012 | Comments (3) | Written by: Richard Duncan