Read some interesting points the other day that draw some caution on China's apparent rise as an economic superpower.
Here are some excerpts.....
Quote:
The municipal government of Jian in China’s Guangxi province has built an eight-lane highway in its city centre even though the population is only 200,000 and there are fewer than 10,000 cars. The Maglev train to Shanghai’s Pudong airport is the ultimate in high tech, but not many people use it because it’s inconvenient and expensive. Given its huge budget, it will take at least 160 years to get the investment back.
These are two examples of infrastructure overbuild in China, cited by HSBC Global Research in its latest report on that country’s economic outlook.
Here are a couple of other examples of China’s capital investment boom. It adds more highways every two years than Japan has in total. The utilisation rate is mostly low. And China’s National Statistics Bureau says installed electric power capacity reached 500Gw by the end of 2005 and there are 300Gw under construction. The number of generators still to come is similar to capacity in the UK, France and Germany combined.
Andy Xie from Morgan Stanley estimates that the total property under construction across China at the end of 2005 amounted to 1666 million square metres. At the official average selling price, this represented a market value of 4.6 trillion renmimbi ($772bn) – or 25% of total 2005 GDP.
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Steelmaking capacity in China exceeds demand by 120 million tonnes, and new mills with a capacity of 70 million tonnes are being built. Coke over-capacity of 242 million tonnes exceeded 2005 demand by 100 million tonnes. Another 120 million tonnes of capacity is under construction.
Production capacity in China’s vehicle industry now exceeds annual sales in China by 2 million. The government says 10 sectors – including aluminium, cars, cement, coke, steel and textiles – have capacity problems.
Is it any wonder when you look at the extent of excess capacity on the manufacturing side of China’s economy that you see an Australian steelmaker, Bluescope, forced to downgrade its profit outlook for the second time in a matter of months. It is being crucified by Chinese competition. Bluescope shares shed 12% in one day last week, bringing its total fall to a nerve--wracking 36% in a matter of five months.
Kirby Adams, Bluescope’s CEO, said: “This is not a global steel demand issue; it is a regional over-production and steel supply issue.” But it is a global – not a regional – problem. We can see this in the $US24bn ($32bn) takeover bid by Mittal Steel, which is controlled by an Indian entrepreneur, for Europe’s largest steel-maker, Arcelor. China’s excess capacity and the implications this has for a massive global price war is forcing defensive consolidation of the industry.
Bluescope’s one-day fall of 12% testified to the markets’ misreading of what is actually happening in China. The company has been hit by the double whammy of being undercut in export markets and the erosion of its domestic market as local packaging manufacture is driven offshore.
Our local manufacturing industry is being undermined both by competition from lower wage-cost countries and by the Dutch disease – the appreciation of our exchange rate because of the boom in commodity prices. But the impact does not stop with Bluescope. It’s only a matter of time before China’s excess capacity impacts adversely on commodity prices. Equally problematical with the timing issue is the extent of that coming impact.
If you want an easy history lesson in the effects of excess capacity just look to Japan and what happened there before and after 1990. Through the 1980s, Japan Inc was the poster boy of the global economy. But the country’s unique economic culture eschewed free markets in favour of centralising control in the hands of a bureaucratic, corporate and financial elite. That created a structurally flawed mega-economy. As a result, Japan suffered more than a decade of deflation and rolling recessions. Only now is it being said that Japan has returned to a sustainable – although very modest – growth path.
It does not automatically follow that China is destined to go down the Japanese path of deflation and recession. In some ways it is positioned in a more favourable way than Japan was back in 1990. Admittedly, its quasi-command economy, along with the entrenched culture of what we would call crony capitalism, pays rather less than even lip-service to free market discipline. But the Chinese authorities, especially at the central level, have demonstrated a degree of flexibility and preparedness to take tough decisions that was notably lacking from the Japanese experience.
China, however, is nowhere near the cohesive and obedient society that is the case in Japan and which enabled it to stumble through its extended crisis with minimal political unrest. In 2004, two Chinese writers Chen Guidi and Wu Chuntao published Investigation of China’s Peasantry which exposed the way in which rural China (where 70% of the population lives) had fallen far behind urban Chinese.
Even though Beijing banned the book, it has, according to Business Week magazine, sold seven million copies. The authors wrote: “One can say that the Chinese are the world’s most kind, obedient and tolerant group of people, But once angered they can suddenly become the world’s most gigantic, fearless and destructive force.”
Ominously, China’s official statistics record growing dissatisfaction being expressed through “mass incidents”. In 2005 there were 87,000 incidents of social unrest recorded, compared with 74,000 in 2004. Nobody believes that all such events are captured in the official statistics.
This escalating violence – for that is what is usually involved – occurred at a time when the Chinese economy grew at 9.9%. Looking at the structural problems now emerging, it is unlikely to repeat its performance this year. But it is possible growth will only be clipped by a percentage point or two in 2006.
There is a view among China watchers that the central govern-ment will do everything in its power to maintain economic momentum and minimise political unrest until the 2008 Olympics are out of the way. If that is the case, then all possible efforts will be made to prevent over-capacity being addressed by market forces. This can be done by extending low and no-cost credit to the sectors of excess capacity. At the same time, policies aimed at encouraging consumption instead of investment could be pursued. Despite the incredibly low level of private consumption as a proportion of GDP in China, the challenge involved in increasing consumption is huge.
The bottom line for Australia’s commodity boom is that it is now on increasingly shaky ground. Bluescope shareholders did not appreciate what China’s over-capacity meant to them. BHP and Rio-Tinto shareholders are now on notice.
What happens in a condition of over--capacity is that the prize goes to the last man standing. Those faced with going under, borrow to maintain market share and to survive. In a country where risk management is not among the tools of the traditional banking system, this means the over-capacity cycle can be extended. The longer it goes on, however, the higher the risk that deflation will take hold. China would then be exporting deflation to the global market. We could have a situation where commodity prices remained strong but all other prices were falling. But that wouldn’t last for long.
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