China’s slowdown has arrived.
This morning, we learned that China’s economy grew by 7.4% in the third-quarter of 2012, compared to the same time last year.
That’s the seventh quarter in a row that the pace of growth has slowed. And it’s the slowest growth seen since the first quarter of 2009 (back when the global financial system was imploding).
Yet China’s leaders don’t seem to be panicking. There’s a very good reason for that.
And as I’ll explain in a moment, this lack of panic could be very bad news for anyone betting on a huge commodities rebound…
China’s ‘unthinkable’ slowdown is here
Once, the idea that China’s growth would slow to a mere 7.4% was unthinkable. Anything below 8% was seen as mass revolution territory.
That wasn’t just some figure plucked from thin air by bullish China analysts either. In 2010, notes Bloomberg, Premier Wen Jiabao said that the country needed 8% growth to ensure “basic stability of employment”. Anything lower would create “problems”.
It seems that’s no longer the case. There was a very interesting story on Bloomberg this week about the recruitment problems Chinese employers are having. It seems that despite the economic slowdown, staff are still hard to come by, and wages are still rising.
According to Louis Kuijs of Royal Bank of Scotland, it’s all down to the one-child policy and its impact on population growth. There simply aren’t as many new workers joining the workforce. So the slowing economy is being offset by a falling supply of workers.
Notes Bloomberg: “The working-age population is growing at 0.5% a year now, one-third the pace of ten years ago, Kuijs estimates. That means the benchmark [GDP] growth rate may be 7%, he said.”
However, while that might be good news for China (at least until the demographic picture deteriorates even further), it’s not such good news for anyone betting on a rampant Chinese ‘stimulus’ package.
The Communist Party wants a quiet life
Why not? In this week’s issue of MoneyWeek magazine (out tomorrow) my colleague Merryn Somerset Webb interviews experienced China hand Jonathan Fenby about why he thinks both the bulls and bears are wrong on China. (If you’re not already a subscriber, you can subscribe to MoneyWeek magazine.)
Jonathan points out that the most important aspect of understanding China is to understand the aims of the people who run it – the Communist Party. And their primary aim is to keep the population happy with the status quo.
That makes sense to me. The people who run China are like the rest of us – they like a quiet life. In China’s case, a quiet life involves being able to sit at the top of the civil service and cream off a lot of the money that flows through the system. In return, you make sure anyone who wants a job can get one, and that people’s standard of living broadly keeps going up.
On the one hand, a stimulus package is quite useful for creating new jobs and preventing global trade from utterly collapsing. That’s what China achieved with the big stimulus in 2008/09.
Trouble is, ‘stimulus’ is also very good at creating social inequality and inflation. It boosts asset prices, and in China, the price of property in particular. As any British person can tell you, few things irritate an up and coming younger generation more than being unable to ‘get on the housing ladder’.
So as far as the Chinese leadership is concerned, stimulus is a double-edged sword. If they can maintain employment rates without having to run the economy any faster, and risk boosting inflation or inequality by reflating the property bubble, they’ll be content to do that.
Also, if they can avoid splurging yet more money on shoddy infrastructure, in favour of pushing the whole ‘Chinese consumer’ story harder, they’ll do that too.
In turn, that means that anyone betting on a big infrastructure spending push by the country to boost their own prospects – such as producers of industrial metals, or machinery providers, for example – are barking up the wrong tree.
In short, as I’ve noted before, the price of many raw materials could have a lot further to fall, almost regardless of the nature of China’s landing. And that could take a further toll on the mining sector.
However, there is one group of miners I think could actually do well from China’s slowdown: gold miners. One big problem for gold miners in recent years has been soaring costs. But if there is less demand for labour and machinery, then some of that cost pressure should ease. That would be great for profits, particularly if the price of gold also continues to rise. My colleague Simon Popple has recently launched a precious metals newsletter – Metals and Miners.
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