I want to talk about China this week. But first, a note on the euro. I wrote in August 2009 that the European currency experiment was under rather too much strain for comfort.
I quoted CLSA’s Russell Napier pointing out that the region’s failing economies hadn’t a hope of coping with the deflation (pay cuts and so on) needed to make them competitive enough to grow. At the time, he said it was unlikely “that any democratic government would survive . . . rapid deterioration in the wealth of its populace” via deflation. So, at some point, the European Central Bank would have to abandon its “bulwark against inflation” stance and loosen monetary policy substantially.
It is looking increasingly as though he was right. Note the protests all over Greece this week in response to the suggested austerity programme there.
As Napier points out this week, while deflation might be a technical term to the likes of Jean-Claude Trichet, it is “political and social hell” for everyone else and they’ll do what they can to avoid it.
Back in August, I also said I expected the euro to weaken and suggested that anyone holding substantial euro assets might like to lighten up on them a little. The euro has since fallen, but more trivially than significantly.
In spite of the talk of break-ups and bail-outs, and in spite of the fact that the strains on it are increasing at speed, it is still well up on its 2008 lows and 20% higher than in 2001 on a trade-weighted basis. And, even against the dollar, it trades not far off $1.40, when theoretical purchasing power parity puts it at more like $1.15.
Indeed, when you look at a chart of the currency’s path over the past decade, your first thought is unlikely to be that it is looking cheap. Instead, as Halkin’s Robin Aspinall puts it, you just think: “Gosh, hasn’t the euro got a long way to fall.”
Napier expects to see further social unrest, followed by “blood on the streets” – possibly in the early summer as it hits 30 degrees in Athens and unemployed youths start getting restless.
Then, he says, Trichet should finally realise that deflation is not an option and get going with the money printing.
If you still have euro assets, now might be a good time to sell them.
This brings me neatly back to China, a subject many of you have been contacting me about since I came over all bearish on it a few weeks ago.
Why? Because a falling euro is yet another reason to be nervous about extrapolating China’s famous 8-10% a year growth much further. As Argonaut’s Barry Norris points out, the European currency has appreciated by over 40% against the renminbi since 2005. That’s one of the reasons so many of Europe’s manufacturers (Italian textile producers, for example) have performed so dismally recently – they’ve all been undercut by cheap Chinese producers.
In 2008, Europe imported three times as many goods from China as it exported to China. Norris is a European equity specialist, so he is obviously looking for reasons for things in Europe to improve (no easy task). But still, it is clear that, as the euro falls, so China’s price advantage will narrow.
This matters. There is still a view knocking around that China can somehow decouple – that it can still grow at speed even as its exports to the West fall. Surely the fact that the Chinese stimulus programme has worked so well at keeping growth high shows that it can grow without us, said an emerging market specialist to me this week. “Hmm,” I said. “Surely the fact that it needed a stimulus programme in the first place shows that it cannot.”
The other bull point I have been reminded of several times since I last wrote on China is that it needs infrastructure, so spending on infrastructure counts as growth. The favourite statistic is this: today, China has only 25% of the railway track that the US had in 1916. My answer? China has 147 airports and is planning another 90-odd. And that’s in spite of the fact that more than 60% of people already live within 90 minutes drive of an airport. I don’t think you could have said that about 1920s America.
China has plenty of infrastructure. I’ve spoken to a lot of people about China recently and, while I accept that there will be a few good investments about (rare earth metals, electric cars and anything to do with cleaning up pollution, says Chris Rynning of Origo Capital), I still can’t see a good reason for most of us to put our money in. And I’m beginning to wonder if anyone else really can, either.
Anthony Bolton is launching his new China fund in April as an investment trust. Normally, investment trusts trade on their merits – IFAs get no commission for piling people into them.
Not so with this one. Fidelity is paying commission to advisers who recommend the fund for their clients’ individual savings accounts. If China was such a dead cert of an investment, why would they feel they needed to do that?
• This article was first published in the Financial Times