7/19/2012 6:12 PM ET|
China's economy about to heat up?
As growth slows, China's leaders appear to have put economic reform on a back burner. And that presents investors with some interesting opportunities.
China's leaders have thrown in the towel. Yep, they've decided to go for growth now and let reforms wait.
Remember all that rhetoric about the need to move China's economy away from export-driven growth and toward domestic, consumer-driven growth? Forget it.
Remember the pledges not to repeat the infrastructure and industrial sector spending that rescued the Chinese and global economies during the financial crisis in 2008? Toss 'em in the trash.
Remember the efforts to dampen-real estate speculation and to cool China's overheated real-estate sector? Stamp them "rejected."
A reaction to slower growth
China's leaders have read the official numbers that show China's economy slowed to a 7.6% annual growth rate in the second quarter of 2012; they've looked at the unofficial numbers -- things like electricity consumption -- that strongly suggest the official growth numbers are significantly overstated; and they have read the projections from the International Monetary Fund and others that Europe's slowdown will be even more pronounced that expected in the second half of 2012 and the recovery in 2013 anemic.
They've decided that the risk to their control of China is just too great. The implicit bargain between China's leaders and the Chinese population is that the Communist Party will deliver economic growth and a rising standard of living. That remains the government's priority. Reform of the country's economy will just have to wait.
Without fanfare, without any of the hoopla that accompanied the stimulus flood of 2008, without even a clear reversal of former rhetoric, China's leaders have gone back to the tried and true playbook. China has, once more, embarked on an investment-driven, infrastructure-heavy, government-financed effort to stimulate the economy.
In the short run, I think it will work. Growth will rebound in China, and that will push growth higher in the global economy, too.
In the long run, though, it will leave in place all the inefficiencies and misallocations that the now-abandoned program of reform was supposed to address. The fix has been put off to another day. China is hoping that the problems won't be much worse by the time it is ready to deal with them. But I think down the road it will be just that much harder for China to tackle its fundamental economic problems, from a crony-favoring banking system to zombie state-owned enterprises.
Reading the tea leaves
What has happened in the last few weeks to convince me that China has made this huge shift in policy -- without a major policy announcement? Take a look at two important indicators: airports and railroads.
On July 12, the website of China's State Council reported that China will increase spending on construction of airports and other air travel infrastructure. The statement was the second recent official notice of the government's intention to increase spending on air travel infrastructure. On June 11, the head of China's Civil Aviation Administration, Li Jiaxiang, told the online version of the People's Daily that China's major airports are now running at full capacity and that China will build 70 new airports and renovate or expand 100 existing airports. That's a big increase from plans for 45 new airports within five years announced in 2011.
On July 17, a document posted on the website of the National Development and Reform Commission's Anhui office reported that the government had increased its investment goals for China's railroad system by 9% from the previous 411.3 billion yuan ($64.5 billion) total. Full-year spending will climb to 448.3 billion yuan. That would require about 300 billion yuan of investment in the second half of 2012, up from 148.7 billion yuan in the first half of the year.
I think this expansion in railroad spending takes an ax to the argument that China won't be able to pursue a 2008-style stimulus package because the country's banks, local governments and government ministries have taken on too much debt. The new railroad spending total was preceded by a huge increase in the debt ceiling at China's deeply indebted Ministry of Railways. In February, the Ministry of Railways was brushing up against a ceiling that limited its debt to 40% of its assets. That limit would have allowed the ministry to issue just $2.1 billion more in bonds. But on May 29, the State Council approved a proposal by the National Development and Reform Commission to increase the debt limit to 100% of the Railway Ministry's assets from the previous 40%.
It sure doesn't look to me as if the debt already on China's books will keep it from being able to stimulate its economy the way it did in 2008.
Chinese speculators, traders, and investors, accustomed to reading the Beijing government's veiled hints about changes in policy, have concluded that the government has not only begun another round of stimulus but is also increasing the speed of that effort -- no matter what officials say about policy.
VIDEO ON MSN MONEY
another Train wreck waiting to happen.
who is going to use all of this new transportation?
BBC just had a report on how people have more money but are growing less and less happy. Also on how the chinese who have money are doing everything they can to leave the country. If the best and the brightest leave, how long do you think that can keep things going?
HOW AND WHY WOULD A GOVERNMENT CONTINUE TO IMPORT POISON FROM A COUNTRY?
CHINESE DRY WALL AND PRESCRIPTION DRUGS MADE WITH STREET PAINT AND OTHER TOXINS HURT THOUSANDS OF PEOPLE.
NOT TO MENTION FORCED ABORTION.
REALLY, THE PRO LIFE PEOPLE IN WASHINGTON MUST BE GETTING A PAY OFF OR THEY SIMPLY KNOW WHAT COUNTRIES THEY CANNOT TELL WHAT TO DO OR START WAR WITH.
The Chinese economy needs to expand by 10% a year to keep up with their yearly population rate increase. Policy changes towards moving China into a consumer culture will only work when they have increased the purchasing power of their mass poor. America is suffering a similar problem of trying to support a consumer culture through government stimulus sprees. A market driven economy doesn't work well when the top 10% own 90% of the wealth and the distribution gap continues to expand.
China will continue to buy up raw materials all over the world but without a consumer to buy the finished goods they are only prolonging the inescapable need to distribute the wealth more evenly to support a consumer driven economy.
The problem with global trade isn't the U.S importing inferior goods and services. The problem is unequal trade policies and currency discrepancies. An example would be the number of foreign companies taking advantage of NAFTA through Mexican Maquiladoras.
We can all do something constructive by refusing to buy Chinese made product. We don't have to be whores for the jackwagons that passed NAFTA and GATT. We don't have to participate in the so called global economy if we chose not to. The two treaties I mentioned were passed by a republican congress and signed into law by Bill Clinton. There's enough guilt to go around for the selling out of America rather than fix the problems with unions. For the wealth of a few, America was sold out when those two treaties were enacted.
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