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The great boom of China just keeps going – in fact, it’s picking up speed.
China’s economic growth hit 10.7% last year, according to the country’s National Bureau of Statistics. Investment bank Goldman Sachs now reckons that China will overtake Germany as the world’s third-biggest economy in 2008.
But China’s facing a huge stack of problems, ranging from environmental hazards to an unwieldy and corrupt system of governance – so how long can it keep up the pace?
As The Telegraph points out ‘questions remain about how long China can maintain its rate of growth.’ The paper quotes Xie Fuzhan, head to the national statistics bureau as saying, ‘problems still exist with the irrational relationship between investment and consumption, and the imbalance of payments and excess liquidity in the banking system.’
In other words, too much money is being spent on building infrastructure that isn’t justified by levels of consumption in the country, and that’s partly because there’s an absolute glut of money swilling around the system, just desperate to go somewhere. Fixed-asset investment in cities and towns grew at 24.5% last year, while the trade surplus came in at $177.5bn. Meanwhile, the Shanghai stock market rose by more than 100% last year. Foreign investors are piling in, but the chances of a hefty correction are also growing.
In an effort to keep the economy from overboiling, the central bank has hiked interest rates twice since April, and also increased the amount of capital that banks must retain to back their lending. But in the face of that wall of money, the bank’s efforts are not having a great deal of impact – not unlike central banks elsewhere in the world.
And there are many other threats to China’s continued growth, some of which it shares with India. Environmental problems in the form of pollution and water shortages affect both countries; as does the threat of social instability, as more and more people migrate from the countryside to the cities in search of work, and the population gets fed up with corrupt officials interfering in their lives.
However, amid all the concerns about governance, the environment, and surging liquidity – all of which are definite threats – it’s important to remember that industrialisation is a lengthy process. Pundits have been warning of a hard landing for China for a good number of years now – but you can’t build a modern urban economy overnight.
For all the rank poverty that still exists in China, people can see that there opportunities to have a better standard of living, with all the goods and conveniences that we all take for granted. At some point, decades from now, the Chinese might have reached a point where their culture suffers from the existential angst about consumption that only a rich society can indulge in. But for now, they rather like the idea of owning cars, fridges and all those other things that buy you that little bit of extra time and comfort, to be squandered as you see fit.
There may well be corrections on the way – and there’s always the chance of a catastrophic social collapse, though if enough people believe that they stand to benefit from the direction the country is heading in, then this can hopefully be avoided.
So overall, it seems a better bet than not that China’s progress can continue. And that’s good news for anyone invested in commodities – which also feature heavily in this week’s MoneyWeek cover story, where five of our experts each pick their one favourite share tip that they believe could help you retire rich. The magazine is in the shops today, but subscribers can download their copy here: Latest issue.
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Turning to the stock markets…
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In London, the FTSE 100 hit a fresh 6-year high yesterday, but gave up early gains to close 45 points lower, at 6,269, as investors took profits. For a full market report, see: London market close
On the Continent, airline Deutsche Lufthansa led the DAX-30 lower to a close of 6,719 in Frankfurt, a 28-point fall. In Paris, the CAC-40 also ended the day weaker, falling 28 points to 5,609.
On Wall Street, US stocks dived lower as investors were rattled by a sell-off in the bond market. The Dow Jones experienced its worst day of the year – and its first triple-digit loss – as it fell 119 points to close at 12,502. The tech-rich Nasdaq ended the day 32 points lwoer at 2,434. And the broader S&P 500 closed 16 points lower, at 1,423.
The Nikkei fell back from six-year highs yesterday to close at 17,421, a 6-point fall. The Hang Seng fell 388 points to close at 20,381 as investor sentiment was hit by Wall Street losses.
Crude oil was 50c higher at $54.73 this morning, whilst Brent spot was at $54.61 in London,
Spot gold was trading at $645.10 this morning, down from $654 – its highest level since August – in New York late last night. Silver, meanwhile, had slipped back to $13.26/oz.
And in London this morning, sportswear chain JJB announced that founder and former Wigan Athletic boss David Whelan was planning to sell an 8.6% stake in the firm worth £52.9m, cutting his holdings to 29%.
And our two recommended articles for today…
The Bank of Japan’s big mistake
– The Bank of Japan’s decision to keep interest rates on hold was not an error so far as monetary policy goes, says Stephen Roach. But the bank’s submission to political pressure has done serious damage to the country’s image in the eyes of investors. To find out the likely implications of the BoJ’s latest decision, see: The Bank of Japan’s big mistake
How to profit from carbon trading
– The issue of global warming is hard to ignore – even President Bush has finally acknowledged the problem and issued a call to action. But where there’s a problem, there’s an investment opportunity – carbon trading, for example. Merryn Somerset Webb explains how you can get involved in this MoneyWeek article, just available to non-subscribers: How to profit from carbon trading