China has taken an important, but for now mainly symbolic, step toward reforming its financial sector. The People’s Bank of China announced Friday evening that starting the following morning—or July 20—the floor on lending rates would be abolished. Previously, banks have been barred from offering loans with interest at less than 70 percent below the one-year benchmark—now at six percent. Now that restriction is gone.
NEWPORT BEACH – After years of tweaks, Japan has now initiated a major shift in its policy paradigm, with reactions ranging from great optimism that the country may finally be lifted out of a quarter-century of economic stagnation, to concerns that the authorities’ dramatic change of course may in fact end up making things worse. But, while debate naturally focuses on Japan’s economic, financial, and political maneuvers, the tipping point could well lie abroad.
It is impossible to say whether the recent threats from North Korea constitute a clear and immediate danger or whether the strong threats are just bluster in order to extract food aid and technical assistance from the international community.
TOKYO – While the world focuses on the gathering of cardinals in Rome to choose a successor to Pope Benedict XVI, a similar conclave is underway in Tokyo to choose the Bank of Japan’s (BOJ) next governor. And, as with the deliberations at the Vatican, politics, not doctrinal debate, is underpinning the decision-making process in Japan.
2013 will be remembered as the year China became a more “normal economy”. What does normality mean for China? Soon-to-depart Premier Wen Jiabao’s oft-cited quote that China’s growth is “unbalanced, unsustainable and uncoordinated” is a good place to start.
The rhythm is as old as mankind. It is poignantly described Nobel laureate Halldór Laxness through the life of an Icelandic sheep farmer a hundred years ago in Independent People, harrowing because his ruin is so utterly human.
Studies by the World Bank covering two centuries of data sketch a pattern of 10-year supercycles, followed by a slide for the next 20 years or so as excess investment leads to a flood of supply. The long bear market can be cruel for those hanging onto to resource stocks, convinced that the rebound must be nigh.
Mark Ryder, Australian investment chief for UBS, says we are reaching just such an inflexion point as China’s manic construction phase gives way to more sedate growth, and Europe, America, and Japan take their fiscal medicine. "The commodity super cycle’s end is at hand. The scene is set for a momentum shift," he said.
This view is daily dinner talk in Australia, a country that lives off iron ore and coal sales to China - and described contentiously by Dylan Grice from Societe Generale as "a credit bubble built on a commodity market built on an even bigger Chinese credit bubble".
It is starting to take hold as the new consensus in the City where funds are keeping a close eye on the mining trio of BHP Biliton, Rio Tinto, and Brazil’s Vale. All three are battening down the hatches as hopes fade that this year’s 23pc fall in iron ore prices will soon reverse. Rio is cutting $5bn in spending by 2014. Vale is expected to pare back its $40bn investment plans next week.But it is a report by Citigroup’s Edward Morse that has most rattled resource. He claims that America’s shale gas revolution -- which has cut US natural gas prices by 70pc -- is a taste of what will happen across the gamut of commodities as vast investment comes on stream. The inference is that parking money in "long-only" resource index funds -- worth $250bn -- has become a mug’s game.
It is the classic pincer movement of supply and demand, with Chinese imports of iron, copper, coal, and oil cooling at just the wrong moment. "It is now clear the commodity super-cycle is over. The overall slowing and the restructuring of the Chinese growth model should mark a watershed in global commodity markets. For many industrial metals, China, in fact, was responsible for all of net global demand growth after 1995," he said.
To be precise, China’s share of total world demand in 2011 was: soya (27pc) cotton (38pc), aluminium (40pc) iron ore (40pc), coal (42pc), zinc (42pc), lead (43pc), copper (43pc), and lean-hogs (50pc).
Mr Morse says China’s growth will slow from 10.5pc to 5.5pc by 2020 - Credit Suisse thinks it could be as low as 4pc, and the US Conference Board 3.7pc - but the crucial twist is that appetite for resources will wane as the Politburo calls time on history’s greatest building boom in history and opts instead for a modern, sleek, consumer and service-driven economy.
This then is the argument of the bears, one that many of us will have to grapple with over coming months. If they are right, it will churn up the global investment landscape, rippling through the currency markets. Much of the London Stock Exchange is a resource play, either directly or through Russian and Kazakh companies and such-like that feed off commodity economies. But are they right?
It is not entirely clear to me why a such a China would be energy frugal. The country is to add 125m cars over the next five years, half the entire US fleet, which will have to be parked in multi-story blocks or below ground. Petrol at the pump costs 66p a litre, so it is not exactly rationed. (Saudi Arabia is worse of course: it costs 5p for diesel).
In any case, the Reserve Bank of Australia -- keenly alert to the China’s story -- disputes the basic premise. It argues in a report that construction will not peak in absolute terms for another five years as 20m rural migrants pour into the cities each year. The pace will not slow much until the urbanisation rate reaches 70pc in 2030.
The RBA said China’s growth will become more "steel-intense" -- not less -- as building shifts to high-rise blocks and urban sophistication. "Steel used in residential construction will peak around 2024, at a level that is 30 per cent higher than in 2011," it said.
I have made two trips this year to cities deep in the interior and it is hardly a secret that Chengdu, Chongqing, Xi’an, Changsha, and Kunming and others are attempting to replicate the East Coast booms with their own metropolitan extravaganzas over the next decade.
Chengdu’s planning chief told me the Hukuo feudal system that keep peasants stuck in their villages is being dismantled in Sichuan, opening they way for a fresh wave of migration. She expects her city to grow from 14m to 20m by 2020.
Nor is it clear that the Communist Party is yet ready to wean the country off state credit, top-down planning, and chronic over-investment, an addictive model for Maoist patronage.
China’s Development Research Council knows that the catch-up model launched by Deng Xiaoping in 1978 is no longer fit for purpose as China moves up the technology ladder.
Yet the Party’s 10-year power transition last month seems to have been a victory for hardliners. Key reformers were shut out of the seven-man Standing Committee. The North-Korea trained Zhang Dejiang has tightened his grip, a boon to the state-owned behemoths. It looks as if the Politburo may try to keep the infrastructure blitz going for another cycle, extending it to the 800m or so people of the hinterlands.
This is fatal for China. Such a course risks ensnaring the country in the "middle income trap" over the long-run. But in the short-run -- say another five-year cycle -- it could kindle a fresh burst of uber-growth, with demand cascading through the Asian tigers and the commodity complex.
Standing back, you might argue that commodities have held up remarkably well this year given that Europe has crashed back into double-dip slump, that the US slowed to stall-speed over the early summer, and that China itself has been through a quasi-recession with falling electricity use and rail freight, and a collapse in steel output.
For Brent crude to trade at $111 a barrel in such a bleak world suggests that Asia’s industrial revolutions have pushed oil prices to a structurally higher plateau. Energy costs may well punch higher once the next cycle of growth is under way.
No doubt the Malthusian narrative - peak this, peak that - at the top of the commodity boom four years ago was overblown. The US energy revival has shown how quickly human ingenuity can sweep away assumptions.
Yet all the nagging worries about resource depletion are still there. New supplies of oil are mostly deep in the ocean beneath of layers of salt, or in Russia’s arctic High North, or in Canadian tar sands at a production cost of $90.
The US National Academy of Sciences says that 26pc of all copper that ever existed in the earth’s crust has already been lost in usable form for mankind, and to my knowledge this claim has not been refuted. Platinum supplies are even tighter.
The shift towards an animal-protein diet in China and across Asia continues to gobble up supply of grains as feed, in competition with biofuels. United Nations data shows that the world is losing 12m hectares of arable land each year (Britain’s total is 17m) due to urban sprawl and degradation, yet there are an extra 73m mouths to feed each year.
For two centuries, commodity prices fell ever lower in real terms with the nadir of each cycle, in what is known as the Singer-Prebisch process. The terms of trade seemed forever rigged agaisnt the primary producers.
There is a some evidence that this is finally going into reverse as scarcity takes its revenge. If so, we may find that the supercycle is still in rude good health next year as China cranks up construction again, and America turns the corner.
And never, ever ignore the global money supply. The key gauge -- real six-month M1 -- touched bottom at 1.5pc in May. It jumped to 3.7pc in September and seems on the same track for October. The world’s kindling wood is crackling again. Can commodities really stay cold?
In the course of a U.S. presidential campaign, the American public is bombarded with surveys asking voters to rank the relative importance of various issues, and whether they think the country is overall on the right track. Not so in China, where another leadership transition has just concluded, with the 18th Party Congress choosing Xi Jinping to succeed Hu Jintao as party secretary now and, in March, as president of China.
China urgently needs to rebalance its economy, both to avoid the risk of a domestic banking crisis and to reduce its excessive claim on global demand. How it chooses to do so, however, should not be constrained by too much focus on the value of the renminbi. The exchange rate is only one of the mechanisms, and not even the most important, that will determine the price of Chinese goods abroad.
A combination of circumstances has suddenly raised the likelihood of a resumption of economic reform in India.
Either way, Korea’s debt level alarms officials here because it mirrors the pre-crisis levels of major economies bound for trouble. In 2007, for instance, U.S. household debt stood at roughly 140 percent of disposable income, according to the International Monetary Fund. (It’s now down to 120.) In Spain the pre-crisis ratio topped out at about 130 percent, according to the McKinsey Global Institute.
The Japanese debt-to-disposable income rate is around 120 percent, according to the IMF. In China, the number stood at 17 percent in 2010, according to Forbes, largely because few families take out mortgage loans.
TOKYO – China is now engaged in bitter disputes with the Philippines over Scarborough Shoal and Japan over the Senkaku Islands, both located far beyond China’s 200-mile-wide territorial waters in the South China Sea. Indeed, so expansive are China’s claims nowadays that many Asians are wondering what will satisfy China’s desire to secure its “core interests.” Are there no limits, or does today’s China conceive of itself as a restored Middle Kingdom, to whom the entire world must kowtow?
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