Last week I said that a really contrarian bet on the decade might be to sell any exposure you have to the Chinese equity markets. That looked a little nuts to most people. Even Bill Bonner, the most contrarian man I’ve ever met, told me it was “a little too contrarian”. But a few days on, selling China doesn’t look quite as ludicrous as it did.
On Tuesday, the authorities raised the required reserve ratio for commercial banks (effectively reducing the amount they can lend out). It wasn’t a big move (0.5%), but it’s still a big deal. Why? Because as John Stepek noted in Money Morning (our free daily e-letter, which you should sign up for immediately) earlier this week, China’s impressive growth over the last few years isn’t down to any innate specialness.
Rather, the key factor behind its apparent resilience to the recession is the same one that’s so far stopped America and Britain sinking into proper depressions – cheap money, and lots of it. The Times cites “local reports” which suggest Chinese commercial banks lent out the equivalent of $54bn in the first “frenzied five days” of 2010. In China, just as everywhere else, growth has long been about little more than stimulus.
The question is what happens as that stimulus starts to be removed. The answer? Probably nothing good.
Fans of the ‘this-is-the-decade-of-the-East’ theory like to think that China doesn’t need the West to grow any more. But that just isn’t true. The world’s biggest exporter remains entirely dependent on the world’s biggest importers. So as long as US consumers are still strapped for cash, China is in trouble. Particularly given what Elliot Wilson, writing in Spectator Business, calls the country’s “astonishing exercise in mass economic inefficiency”.
In the first three quarters of last year, even as the world’s wallets slammed shut, China’s industrial capacity grew by more than 25%. China has been growing at 10% or so a year for 30 years now. For the last ten years that growth has been almost entirely driven by capital spending. It looks like it’s time for a break.
Living with a mixture of overcapacity and asset bubbles (note Chinese stocks are currently trading on a ten-year average p/e of not far off 50 times) is bad enough. But they aren’t the only things that might hold China back over the next ten years. If you want to have a wealth-creating economy that works over the long term you must offer a trusting and secure environment for firms to operate in.
That’s something China clearly isn’t yet offering. Take Google’s statement that after “sophisticated and targeted” cyber attacks on the Gmail accounts of some of its users (human rights activists), it was no longer willing to censor its Chinese search engine. It’s a “black day” for China, said media freedom group Reporters Without Borders. It may also be a hint that the best of China’s boom is already behind it.