Get Behind China

Chinastructuralchangeschart.pngBy John Richardson

THE blog is often accused of being pessimistic. We are not. We are just realistic.

It was realistic last November to anticipate that China’s new leaders would be dedicated to major economic reform. In fact, this was clear even earlier than that – back in February 2012 when the World Bank produced its landmark report on China – that a fundamental shift in economic policy was taking place.

This excellent article from Reuters highlights, as we have thought for a long time, that Xi Jinping and Li Keqiang, are firmly committed to a major overhaul of China’s economy. They have cemented their power base and will present more details on a radical reform programme at the crucial third plenum of the 18th Central Committee of the Communist Party of China, which is expected to take place in October, adds Reuters.

Quick fixes are no longer possible. Chemicals traders and company executives expecting a return to the type of stimulus-fuelled growth we saw in 2009 are going to be disappointed.

But this should not be a reason for pessimism for anybody who is looking beyond the immediate value of their share options, or the money to be made on the next chemicals shipment to China.

If Xi and LI are successful the opportunities are enormous, as The Economist points out in this article.

These opportunities include a huge surge in the spending power of low-income workers, thanks to successful reform of the Hukou system that at present denies hundreds of millions of workers access to basic social services.

A surge in investment by innovative private firms, if bureaucratic hurdles can be reduced and the allocation of capital improved, is another great opportunity for the chemicals industry.

But, as the chart above illustrates, some essential reforms, such as higher utilities charges and a liberalised interest-rate regime designed to improve the allocation of capital, will have a negative short term effect on demand. Nobody should be surprised, therefore, if real GDP growth in China over the next few years falls to 4% or even lower.

Meanwhile, as this painful shift takes place, the mood music needs to change. Rather than asking China to “save the world” through returning to an economic model that no longer works, chemicals company CEOs and Western politicians and central bankers need to all get behind this make or break effort to transform China.

We worry right now, though, that the huge quantitative easing programmes unleashed first by the Federal Reserve and more recently by the Bank of Japan, will not be supportive of China’s efforts.

There could instead be a “race to the bottom” as currencies are competitively devalued, including the Yuan. China might end up boxed into a corner and thus forced to export deflation.

, , , , , ,

Leave a Reply