China Great Reajustment
China GREAT READJUSTMENT
Next decade view
This is part 4 in DEATH OF COMMODITIES series Part 1-3 here
https://www.stockhouse.com/bullboards/messagedetail.aspx?p=0&m=32292096&l=0&r=0&s=etg&t=list
Adjustment is pretty innocently sounding / misleading word .
Well , China will replace growth based on the shrinking now overinvestment
with growth based on consumer demand .
Easier said than done and in any case it means
-- slower growth, as much as 1/2 the previus decade aver growth
Say 5 % - I am not as pessimistic as Pettis - 3%
--lower commodity prices in next decade
China is still growing nicely - right ? ( thought at slower pace every Y )
Means , is buying more commodities right?
SO, WHY China import prices ( commodities mostly ) are tanking for 3 Y now ?
as this chart shows
https://www.tradingeconomics.com/charts/china-import-prices.png?s=chinaimppri&d1=20050201&d2=20130331
The lower cost of econ. input didn't increase China GDP growth
Did it ?
Just the opposite .
Commodity cos sell more but make lower and lower profits
geeeesus .
The only explanation is : supply grows faster than demand .
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Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets.
a brilliant economic thinker."--Edward Chancellor, Wall Street Journal
https://www.mpettis.com/2012/09/16/by-2015-hard-commodity-prices-will-have-collapsed/
Michael Pettis' dramatic prediction in his 2013 book, The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy.
https://press.princeton.edu/titles/9936.html
He knows too much , talks too long and winding - drives me crazy
Waters down the MAIN bullet points in sea of little facts , adding up to his conclusios
Here his main points
1. ON ECONOMIST'S CONSENSUS THAT CHINA GROWTH WILL SHRINK IN NEXT 10 y
THERE IS NO DOUBT ABOUT IT but MP points out - the bearish consensus is not bearish enough ... quoting historical examples of other countries which went through GREAT REAJUSTMENT before China.
The consensus on expected economic growth among Chinese and foreign economist living in China has already declined sharply in the past few years.
From 8-10% just two years ago, the consensus for average growth rates in China over the next decade has dropped to 5-7%
. But the historical precedents suggest we should be wary even of these lower estimates.
Throughout the last 100 years countries that have enjoyed investment-driven growth miracles have always had much more difficult adjustments than even the greatest skeptics had predicted.
China will be forced to make a drastic change to its development model that will result in average GDP growth of three per cent or less over 10 years.
Its economy will have a long and bumpy landing.
After all, there were many Brazilians in the late 1970s who worried that Brazil’s growth miracle was unsustainable and would end badly,
but none expected negative growth for a decade, which is what happened during the terrible Lost Decade of the 1980s.
Towards the end of the 1980s, to take another example, a few brave skeptics proclaimed that the Japanese miracle was dead and predicted that for the next five or ten years average Japanese growth rates would slow to 3 or 4% (in 1994 the IMF belatedly proclaimed that Japan’s long-term growth rate had dropped to 4%), but no one, even the most skeptical, predicted twenty years of growth below 1 percent.
Finally when the USSR’s economy was hurtling forward in the 1950s and 1960s, and expected to overtake the US within a few decades, even the most die-hard anti-communists did not expect the virtual collapse of the economy in the 1970s and 1980s.
Similarly, the current consensus for Chinese growth over the next decade is almost certainly too high. Even if Beijing is able to keep household income growing at the same pace it has grown during the past decade, when Chinese and global conditions were as good as they ever could be, it will prove almost impossible for the economy to rebalance at average GDP growth rates over the next decade of much above 3 percent.
The consumption pick up looks like this so far
https://www.businessinsider.com/new-south-china-mall-tour-a-ghost-mall-2013-3?op=1
2. COMMODITY PRICES ( EX AGRI ) WILL GO DOWN
For these reasons I am very pessimistic about hard commodity prices and expect them to drop substantially further in the next two to three years.
Production capacity for hard commodities is rising much too quickly, in a belated response to the unexpected surge in demand just under a decade ago.
Expected economic growth rates in the country that has been biggest source of new demand – virtually the only source – have fallen sharply and commodity prices have fallen with them.
Historical precedents and the arithmetic of rebalancing suggest, however, that the current consensus for medium-term Chinese growth is still too optimistic.
Expected growth rates will almost certainly fall further in the next two years.
Beijing has finally become serious about rebalancing China’s economy, and rebalancing means shifting Chinese growth away from being disproportionately commodity intensive
Instead of representing 30-60% of global demand for most hard commodities, Chinese demand will shift to a more “normal” level.
Remember that even a very limited shift – from 50% of global demand, for example, to a still high 40% of global demand – represents a sharp drop in global demand.
IE. APPLYING ONLY 10% DROP IN CHINA DEMAND (NOT ABOVE 20% EXAMPLE) TO Cu SHRINKING DEMAND GROWTH = 2.1 MT MT LESS
THAT'S 14 OT-PIT EQUIV PRODUCTION NOT NEEDED
14 OT's !!! .....GEEEEESUS
It won't be that bad - hopefully demand elswere will pick up a bit
and China will still grow
but still ... looks like quite a TECTONIC SHIFT
There has been so much stockpiling of commodities and finished goods with implicit commodity content in China that the country could well become a net seller, and not net a buyer, of a wide variety of commodities in the next few years.
This is going to come as a shock to many people. In my discussions with senior officials in the commodity sectors in Brazil, Australia, Peru, Chile and even Indonesia, it seems to me that many analysts have been insufficiently skeptical about the Chinese growth model and are unaware of how dramatically the consensus has changed in the past two years. They have failed to understand how deep China’s structural problems are
3 Cu PRICES WILL GO DOWN
HOARDERS counting on higher prices WILL BE HURT
At first glance, China’s copper demand is strong
But that,s due to hoarding and other speculations -
Analysts at Credit Suisse expect \
China’s copper usage to grow by just 1 per cent in 2013,= 1/2 the 2012 growth
in contrast to the 26 per cent growth seen at the height of China’s stimulus effort in 2009.
1% vs past 26% ...... geeeeesus
This gaping discrepancy between apparent demand and actual consumption implies there has been a massive build-up in unreported stocks of refined copper held in bonded warehouses and elsewhere.
Strachan at Capital economics believes these stockpiles have climbed by 900,000 tonnes by middle of 2012 since the middle of 2011
Standard Chartered puts the total amount held in bonded warehouses at 600,000 tonnes, together with another 400,000 held elsewhere
1 mt hoarded = 5 times the LME ( and growing) stockpiles
And that is just last Y data = 7 OT,s production.
To put these figures into perspective, the LME’s worldwide network of warehouses reports copper stocks of just 231,000 tonnes.
In other words, China is sitting on a huge overhang of refined copper.
This partly reflects state corporations’ efforts to build strategic reserves of the metal. But it is also the result of massive speculation in copper.
The details of the trade are complex. But in a nutshell, companies buy copper on margin, then use the metal as collateral to obtain low-cost loans, using the proceeds to bet on higher-yielding assets.
Like steel, Cu cos investing in pig farming or RE speculation
Cu PRICES STAY HIGH BECAUSE CHINESE COS USE MARGIN ON TOP OF MARGIN
GEEESUS
By importing commodities that were funded through trade financing and then using inventory receipts to borrow domestically, banks and borrowers could get around lending restrictions. We have never been able to figure out exactly how much of this was going on, but there was plenty of anecdotal evidence to suggest that this was a pretty wide-spread scheme and it involved a variety of commodities – copper, most famously, but also soy, magnesium, cotton, rubber and several others.
The result has been a tendency to hold much larger commodity inventories than can be justified by business needs and risk management concerns.
By the way when economists try to calculate the amount of unsold inventory of commodities they typically focus on the raw commodity,
but it is important to remember that
4. inventories of finished goods are also forms of raw inventory.
An empty apartment, for example, contains lots of copper wiring, and although it is extremely unlikely that the copper will ever be melted down and sold, it nonetheless has the same price effect as unsold copper inventory.
Why?
Because an empty apartment today is one less apartment that will be built tomorrow to fill real demand, and so it represents a reduction in the future amount of copper that will be purchased to make copper wire.
The same is true of other finished goods.
5 . how much not only CU inventory is in those empty apps ?
The Mail in London estimated that China is building up to 20 new ghost cities a year
https://www.libertynewsonline.com/article_340_30137.php
https://www.businessinsider.com/60-minutes-chinas-ghost-cities-2013-3
https://www.businessinsider.com/satellite-pictures-of-chinese-ghost-cities-2013-3?op=1
https://www.udonmap.com/udonthaniforum/viewtopic.php?p=322881
Investment in infrastructure accounts for much of China's GDP - the country is said to have built the equivalent of Rome every two months in the past decade. And with such a large pool of labour, it is harder to put the brakes on when growth slows and supply outstrips demand.
https://www.bbc.co.uk/news/magazine-19049254
SO, THEY BUILD EQUIV OF 60 ROME.s ( x 3.6 M PEOPLE ) in last 10 Y
= 27 NYC ( x 8.3 M PEOPLE = for 220 m people ).
They were building 2.7 NYC a year for 22 m new people @ NYC density per app.
At Chinese density per app ( say 3.5 ) can be for 26 m people
That.s like new 7.5 m apps /Y
That is supply so what is the demand ?
You have got seven to eight million people entering the workforce in China every single year
That;s about 5- 6 m new households ( assuming 1/4 - 1/3 of new worplaces are taken by womens/ wifes and huge portion of young workers live in factory dorms )
So . there is like 4 m -5 m households in need for new app.
vs 7- 7.5 m apss build /Y
Huge portion of young workers are living in factory dormitories
with 20 or 30 workers sharing three-bedroom flats sleeping eight to a room in bunkbeds.
Or up to 24 people share a room in huge blockhouses.
https://www.guardian.co.uk/technology/2012/may/30/foxconn-abuses-despite-apple-reforms
https://blogs.telegraph.co.uk/finance/thomaspascoe/100020258/the-foxconn-riot-shows-us-the-misery-of-communism-and-the-hypocrisy-of-western-liberals/
Foxconn alone houses like this 1 m workers
SO, WE HAVE 4-5 M NEW HOUSEHOLDS / Y IN NEED FOR UNAFFORDABLE APP
AND 7-.7.5 M APPS BUILD EVERY Y .
Looks like at least 40% OVERSUPPLY GROWTH VS DEMAND GROWTH
ACCUMULATED IN LAST 10 Y OVERSUPPLY OF APPS LOOKS LIKE 25 M FOR 85 M PEOPLE
IMAGINE WHAT WOULD HAPPEN TO 2.5 TIMES BIGGER ECONOMY = US
IF 10 NEW YORK CITIES EQUIV = MOST OF US BIG CITIES ( and all infrastructure )WOULD BE EMPTY.
geeesus .
Even if we adjust for 4 times bigger population of China but 2.5 times smaller economy
the US equivalent of China empty cities
( and economic impact by this giganting missallocation of capital )
is 5 empty NYC.
US RE bubble happened because the number of speculators buying 2-nd , 3-4 - th home jumped to 20% of home sales
In China looks like 33% of home sales is only for speculation
= betting on never ending rise in home prices while creating shrinking affordability
and ever rising number of ghost cities on top of vacancy rates in ALL cities .
THEY SUPPLIED ALREADY 5-6 YEARS OF FUTURE HOUSING DEMAND
MEANS, THEY MAY NOT BUILD A SINGLE HOUSE IN NEXT 5 Y AND STILL ACCOMODATE / HOUSE
THE 14 M PEOPLE FLOWING TO CITIES EVERY YEAR.
ARE THEY GOING TO over- BUILD IN NEXT DECADE at the same speed ?
ANOTHER 25 m empty apps for another 85 m -NOT BUYING THEM -people ?
Another 10 empty NYC ( TO A TOTAL OF 20 NYC ) TO KEEP GDP GROWTH ABOVE 7% ?
CONSENSUS OF ECONOMIST SAYS NO.
THE ONLY DIFFRENCE BETWEEN THEM IS THE RATE OF SLOW DOWN.
All above didn't touch the problem of office space oversupply
IE:Tianjin... will soon have more prime office space than will be filled in a quarter-century at the current absorption rate," says business magazine Forbes
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Those who point to potential great demand for commodities by other emerging countries like India are forgeting 1 little thing
THEY DO NOT HAVE THE TENS OF $$ TRILLIONS CASH ( or lending capacity or earning power ) TO FULFILL THE NEEDS / GOOD WISHES
Such reports " India needs this and that" one can write anytime
10 Y ago , India needed that didn;t it ?
20 Y ago India needed even more
100Y ago ...
Yet their commodity imports growth is not near the projected needs / hopes of growth
China slowdown effect in next 10 Y ( hurting India too- IE iron ore exports ) will be bigger than India acceleration .
iN ADDITION , AS LAST 3 Y SHOW .. RISING TONAGE DEMAND DOES NOT TRANSLATE TO RISING METAL PRICES NOR RISING STOCK PRICES
DOES IT ?
jUST THE OPPOSITE
One sided "reports" - taking up own book of a broker are pretty suspicious .
BUT IF BHP - the one who is most interested of taking up his book, says prices will not reach the 2007 hights YOU LISTEN
BHP 1 sentence is worth 1000 reports by confused and way from objective brokers . and trillions of posts by even more confused individuals taking up their loosing and HOPELESS BOOK
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