Monday, January 19, 2015

China's Slowing Growth Rate

China's economic growth rate is characterized as "slowing," to 7% per annum; but, this means that the giant economy can be extrapolated to double in ten years.  Given recent economic and financial developments, is this really plausible?

The Chinese Economic Miracle was predicated on two key slogans, "Privatization," and the evergreen "Growing Middle Class."  In the intervening decades, we know that privatization meant a selective treatment of some private companies and more the creation of grossly inefficient state-owned enterprises.  Financing of the latter in an environment of low, falling interest rates and growing state surpluses of foreign exchange wasn't an issue as far as the eye could see.

As the Chinese economy grew to the sky, the ruling members embarked on a strategy to corner all the key resources needed to fuel the growth of an industrial economy, from recycled PET to paper, rare earth minerals, copper, and food commodities.

Prices for clean, post-consumer baled PET began a rapid ascent about fifteen years ago, and when I called some of the companies gathering this commodity from municipal waste streams, they all told me that the demand was Chinese and "insatiable."  Chinese consumers also wanted their clear beverage bottles for water and soda.  Today, prices are quite different.

Chinese companies owning copper mines in Chile have seen prices collapse recently.

Again, risk is one thing for a private company with lots of debt and relatively small equity, but it is another thing for the Chinese central banking system.  However, economics ultimately carries the day, especially in an environment when the music appears to be stopping, i.e. rates may be rising.

However, it is also difficult to see what would justify raising rates when Europe, apart from Germany and Switzerland, is a basket case.  Traders are reported to be hoarding oil in a carry trade awaiting normalized, higher prices. Great Britain has an economy where consumers are being offered credit cards on television with 50% A.P.R.s.

Barron's columnist and legendary investor Jim Rogers recently said that he was long Indian equities, which have done extremely well.  However, he said too that he had his doubts about the intentions of the Modi government to really deregulate and reform the Indian economy so as to unleash a real economic miracle consistent with all the press releases.  I think that his skepticism is well warranted.

In the U.S., talk of higher taxes, redistribution and a U.S. National Health threatens the longevity of what has been a slow, lethargic recovery.  As Bill Gross said in a different context, the U.S. may be the "cleanest dirty shirt," among global economic leaders, and it still has the primary reserve currency and liquid markets, so far....

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