{"id":34587,"date":"2012-12-19T21:08:26","date_gmt":"2012-12-20T02:08:26","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=34587"},"modified":"2012-12-19T21:08:26","modified_gmt":"2012-12-20T02:08:26","slug":"is-chinas-rebound-for-real-dont-bet-on-it","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/12\/19\/is-chinas-rebound-for-real-dont-bet-on-it\/","title":{"rendered":"Is China\u2019s Rebound for Real? Don\u2019t Bet on It"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

China’s economy<\/strong> is bouncing back. Apparently.<\/p>\n

The stock market<\/a> has rebounded from its recent low. Economic data is looking more positive. It has a nice shiny new group of leaders<\/a> to take it on to its next stage of development.<\/p>\n

Suddenly all those people who briefly turned bearish earlier in the year are now declaring that there will be no \u2018hard landing\u2019 for China<\/a>.<\/p>\n

We\u2019re not convinced. The business model that got China to where it is today is irretrievably broken.<\/p>\n

And as yet, it\u2019s not clear what will replace it\u2026<\/p>\n

<\/span><\/p>\n

\u00a0China\u2019s Economic Advantages Are All Used Up<\/h2>\n

There\u2019s a great piece on China\u2019s problems by Andy Xie in the South China Morning Post<\/em>. It\u2019s well worth a read.<\/p>\n

Xie argues that China\u2019s growth<\/a> has been based on two major \u2018dividends\u2019. One was its becoming a member of the World Trade Organisation (WTO), which boosted its share of global trade.<\/p>\n

The other was its demographics. It had plenty of young agricultural workers who could be moved to work in cities, producing cheap goods for export.<\/p>\n

The trouble is, both of these dividends have now been used up. The export boom was based on having a Western consumer hungry to buy at the other end. That no longer exists.<\/p>\n

Why not? The average Western worker \u2013 ironically enough \u2013 saw their wages stagnate as global competition kept labour costs down. Meanwhile, central banks suppressed interest rates, meaning that living costs were higher than they otherwise would have been.<\/p>\n

So credit was the only way to maintain a rising standard of living. When the credit bubble burst, that source of demand was cut off. The only manufacturers benefiting from loose monetary conditions these days are the ones servicing billionaires, not the ordinary consumer.<\/p>\n

Meanwhile, China\u2019s supply of cheap labour is drying up. As Xie notes, \u2018the shortage of blue-collar labour, as reflected in wages increasing faster than exports, points to the end of the demographic dividend.\u2019 This trend won\u2019t turn around.<\/p>\n

On the one hand, workers are increasingly being replaced by robots as automation becomes ever more attractive. On the other, the US has a new source of extremely cheap energy in the form of shale gas<\/a>.<\/p>\n

Labour costs are becoming more competitive too, but if you\u2019re going to be using fewer workers anyway, then power becomes a key cost to consider. Better yet, the US \u2013 and Mexico \u2013 are much closer to the end consumer. So after you account for transport costs, the benefits of shipping production out to China just don\u2019t add up.<\/p>\n

\u00a0As the Chinese Export Boom Collapses, So has the Property Bubble<\/strong><\/h2>\n

Perhaps the biggest problem is what China has been doing in the meantime with the money earned from the export boom<\/a>. Xie argues that this money went on inflating China\u2019s property bubble<\/a>, as individuals and companies speculated on ever-increasing land prices.<\/p>\n

In turn, income from land sales and tax on property sales \u2013 \u2018over half the proceeds from property sales end up in the government\u2019s pocket\u2019 \u2013 helped fund China\u2019s wasteful approach to infrastructure investments<\/a>.<\/p>\n

When most of us invest our money, we expect to get a return on it. Say you buy a property as an investment<\/a>. Unless you are buying during a bubble, you expect to be able to rent it out to generate a return almost right away. You don\u2019t expect to have to subsidise it for several years in the hope that it\u2019ll all eventually come good.<\/p>\n

That\u2019s not how China invests. It builds \u2018ghost\u2019 towns and too many motorways, in the expectation that the capacity will one day be needed. But we all know how hard it is to forecast anything accurately. In some cases, this way of doing things will work out. In many others though, you\u2019ll end up wasting the money.<\/p>\n

This doesn\u2019t matter too much as long as there\u2019s a constant stream of fresh money to fund these projects. But with exports drying up, and the property bubble bursting<\/a>, that\u2019s no longer the case. \u2018Like all other East Asian economic booms before, China\u2019s asset bubbles deflate when the export boom ends.\u2019<\/p>\n

What\u2019s the solution? Xie basically argues that China’s economy<\/a> needs to become more capitalist<\/a>. The size of the public sector needs to be cut back, and the government needs to stop interfering in the market. \u2018Bad companies don\u2019t die, because they get government support.\u2019<\/p>\n

Funnily enough, these are the same solutions that \u2018developed\u2019 economies like our own could do with pursuing. And this is the problem. Because I suspect there\u2019s as much chance of China coming over all \u2018pro-market\u2019 as there is of our own government deciding it\u2019s time to pull the plug on the zombie sectors of our economy.<\/p>\n

\u00a0Don\u2019t Buy into a China Rebound<\/strong><\/h2>\n

As Sean Corrigan of Diapason points out, it\u2019ll take a lot more than words to help China make the shift from being investment-led to being consumer-led<\/a>. And even if China does bounce back, don\u2019t bet on the most obvious accompanying trade \u2013 a rebound in commodities \u2013 being successful.<\/p>\n

Rebalancing is as much about giving consumers more rights, and going easier on the \u2018financial repression<\/a>\u2019 (whereby savings rates are well below the inflation rate), as it is about moving even more people to the cities.<\/p>\n

It\u2019s hard to see the next phase of China\u2019s development being anywhere near as commodity-intensive as the last phase. In short, unless you\u2019re a short-term trader, I wouldn\u2019t buy into any China rebound<\/strong>.<\/p>\n

John Stepek<\/strong><\/p>\n

Contributing Editor, Money Morning<\/em>\u00a0 <\/strong><\/p>\n

\u00a0<\/strong>Publisher\u2019s Note: <\/em>This article originally appeared in MoneyWeek<\/em><\/a><\/p>\n

From the Archives\u2026<\/em><\/strong><\/p>\n

Why Small-Cap Stocks Could Be Your Best Investment in 2013<\/a><\/p>\n

14-12-2012 \u2013 Kris Sayce<\/p>\n

How the Global Oil Grab Affects You\u2026<\/a><\/p>\n

13-12-2012 \u2013 Byron King <\/strong><\/p>\n

The Price of Risk in the Stock Market<\/a><\/p>\n

12-12-2012 \u2013 Murray Dawes<\/p>\n

Why Silver Could Be the Best Investment in 2013<\/a><\/p>\n

11-12-2012 \u2013 Dr. Alex Cowie<\/p>\n

The Long, Drawn Out Retreat in Australian House Prices<\/a><\/p>\n

10-12-2012 \u2013 Dr. Alex Cowie<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au China’s economy is bouncing back. Apparently. The stock market has rebounded from its recent low. Economic data is looking more positive. It has a nice shiny new group of leaders to take it on to its next stage of development. Suddenly all those people who briefly turned bearish earlier in the year are … <\/p>\n

Continue reading “Is China\u2019s Rebound for Real? Don\u2019t Bet on It”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-34587","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/34587","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=34587"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/34587\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=34587"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=34587"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=34587"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}