Pleiades slipped me an article about China that's behind the paywall on Crikey. It's a rather depressing article because it spells out the essential problem of having our economic drivers hitched firmly to China. China for its part, keeps telling it is growing at 7% rate, but the growing evidence is that this is simply not true. Earlier in the year I linked to a talk which included an analyst who is closer to the ground and pointed out that China's growth figures are more 'aspiration' than actually measured. In the past, the Party would have said, 7.5% and then the political cadres would crack the whip to make the 7.5% figure stand, so as not to embarrass the party - but the problem has simply gone beyond that point. They bought the economic growth through debt, and the debt has been piling up at various levels and locations and municipalities.
Earlier in the week Zero Hedge had this entry about how nobody outside China who is a serious analyst of China's economy believes in the GDP growth announcements from China any more. If you go to that link you will find a procession of charts covering various areas of the Chinese economy that simply contradicts the 7% growth figure. You simply can't be having 7% growth while all these other negative things are going on in your economy.
And so with that we go back to the Crikey entry from which I want to lift some lines:
What is instructive about the series of daily crashes that continue to break records in whopping out trillions of dollars is that the sharemarket run was a strategy by the government to put more equity into companies and less debt into the growing Himalayan debt mountain.
With government encouragement, millions of ordinary Chinese piled in and eventually lost, in many cases, their life savings, after efforts by the party to “control” the market forces failed. This will surely give very real pause on implementing key liberalisation polices such as the freeing up of the capital account — just how much more money will start gushing out of the country now the government has broken its promise on the sharemarket?
Trust and most importantly confidence have been dented — badly. And confidence, that intangible yet vital mass mood, is as critical to economic management as interest rates. With growth sliding, not one rational economist or China-watcher will admit privately they believe the 7% growth figures for last quarter. The real work indicators show the country is, in many parts, falling into recession.
Oil is falling again, dragging all commodities back with it, and while iron ore is having a mild surprise surge, forecast supply and demand indicate this is only short lived. A good theory is that the steel mills that operate in Hebei, not far from Beijing, are working overtime before the World Championships in Athletics clean-air policy comes into effect in a few weeks. The market-leading Atlas Iron is on life support once more. Its share price collapsed by 70% last week after it revealed that it had failed in a bid to raise US$180 million. So, one suspects, it is good night to them. Many analyst are still tipping iron ore will fall to US$45 in the next six months from US$51 a tonne on Friday.The cat is out of the bag, so to speak. The whole collapse phase in share prices in China prompted some interesting policy announcements whereby it was illegal for you to sell shares, and illegal for you not to buy shares. That was bound to look like the whole market was rigged.
Indeed, the Chinese gambling share investors are getting out altogether.
What is interesting about the Crikey article is that it argues the leading economists who busily hitched Australia's wagon to China were wrong, and worse still, wilfully misrepresented the reality on the ground for their own self enrichment. It's a big call, but it's also hard to ignore the evidence. Let's face it. If China really was so damn remarkably good, why are so many people trying to get themselves sand some money off-shore?
That all brings into stark relief the problem of just what Australia is supposed to do in sight of China's economic slowdown. In the years since the GFC, Australia has essentially doubled down on mining to support China. It has been argued in may places that China's process of 'emerging' is such a great engine for growth that they will continue to need the commodities Australia digs up from the earth. Even the big fuss about the Adani mine and the coal in the Galilee basin represents our attempts to keep digging up ever more commodities for this very process.
The futures market on the other hand has been signalling for a drop in commodities far into the future. If the collapse of their price has ben the product of OPEC trying to force out US shale oil from their positions (and failing), then it is certainly true that the collapse in iron ore prices represents BHP, Rio Tinto and Vale trying to force out the smaller places by not cutting supply in an over-supplied market. Basically, there is a general glut in all the commodities because there has ben ramped extraction in commodities based on the figures presented in the past by China about its growth. If China has been lying about its growth for some years, then it would follow the Chinese market is nowhere near as big as we think it is, and the oversupply is going to be much larger as a result.
In a nutshell, we're producing way too much of commodities and it is leading to the accelerated decline in the prices for the very commodities we produce; and by extension our national income is going to fall. now, you can add an adverb like precipitously or dramatically in front of the fall, but the essential point is, we are going to find ourselves were we were in the late 1980s and early 1990s when the Japanese bubble burst. This time, there won't be a Chinese economy for us to hitch our growth. We may be just about to hit the roughest patch of the economy in 25 years - the roughest patch since "the recession we had to have".
Oh, and when it comes to fossil fuels, the world is divesting, which means the impact will be even worse.
“I haven’t noticed one negative reaction from the shareholders. Look back and would you have been a conscious investor in the 50s or in the 60s in asbestos-related companies, had you known what would come afterwards? Probably not. I am not saying it is the same thing, but there are some techniques, some sectors, some products where the case is now very clear – everything shows that it is not sustainable. Do you really want to be the last investor?”That last investor is looking like it's us, by dint of a very unimaginative government committing us to be the last investor.
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