| 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin? Posted: 15 Apr 2012 10:43 PM PDT Michael Pettis at China Financial Markets has Two Bets with the Economist. - Pettis bets growth in China will average less than 3.5% for the rest of the decade
- Pettis bets the Chinese economy will not overtake the US by 2018
I side with Pettis and said so in The Dating Game: Michael Pettis Challenges The Economist to a Bet on China I came up with 2030 and with peak oil considerations I would not count on that. Now Pettis is back at it with 12 predictions. Via email ... Perhaps my bet with The Economist has caused me to throw caution to the winds, since a smart economist never makes his predictions explicit, but here they are:
1. China will be the last major economy to emerge from the global crisis. My basic argument was that the global crisis was caused by the necessary reversal of the great trade and capital imbalances of the past decade, and a country can only be said to have emerged from the crisis when those underlying imbalances had been resolved.
Since China's contribution to the global imbalances has been its excessively high savings rate, China could not emerge from the crisis until the high savings rate had been reduced to a more reasonable level. Since 2007-08, of course, the opposite has happened, as Beijing has exacerbated its domestic imbalances in order to keep growth rates high. But without infinite debt capacity this cannot go on. I think it is pretty clear that over the next few years China will be forced to address and reverse the high savings rate, and it will only be after this happens that China can be said to have emerged from the crisis. This may take a decade or more.
2. Chinese consumption will continue to stagnate or decline as a share of GDP until the growth model is abandoned. By "abandoning" the model I mean that transfers from the household sector to subsidize rapid growth must be eliminated and reversed.
This is really a continuation of the first prediction. It is too early to say, but 2012 may be the first year in which consumption growth will outpace GDP growth, but only if GDP growth turns out to be much lower than expected – say below 7%. As long as GDP growth rates exceed 7%, there can be no real rebalancing of consumption.
3. Although there were many factors that explained both rapidly rising GDP and the contracting consumption share, financial repression would eventually be recognized to be the key factor. It took many years to make this point, but it has become pretty clear to everyone that financial repression is at the heart of China's problem. This may explain Premier Wen's recent and rather shocking attack on the banks, although in my opinion it will still be at least another year or two, if ever, before we see any real liberalization of interest rates.
Remember that the more debt there is, the harder it is to raise interest rates, and the longer we take to raise interest rates, the more debt we run up. In the end I suspect that financial repression will be eliminated not by an increase in nominal rates but rather by a decline in GDP growth (remember that the size of the financial repression tax is a function of the difference between nominal GDP growth and the nominal lending rate).
4. Investment is being misallocated on a massive scale and this was not due to any special Chinese characteristic but was rather a fundamental requirement of the way the system operated. Although there are still some economists who disagree that investment is being massively wasted, I think this is so well understood by now that there is no need to belabor the point.
5. Debt is rising at an unsustainable pace and debt levels will become unsustainable well before the end of the decade. This follows from the above point – if investment is debt funded and if it is being wasted, then by definition debt must be increasing at an unsustainable pace – i.e. faster than debt-servicing abilities.
I suspect nonetheless that in another year or two no one will doubt that the Chinese growth model tends towards unsustainable debt and that we are rapidly reaching the limit.
6. When specific debt problems are identified, resolute attempts by Beijing to resolve them would be warmly welcomed by analysts but wholly irrelevant – because the problem of debt was systemic, not specific. This follows from the above. The issue is not that specific borrowers may run into debt problems. It is that the run-up in debt is systemic and cannot be prevented as long as China maintains the existing growth model. If there is rapid GDP growth, say anything above 6% or 7%, debt within the system must be rising at an unsustainable pace.
7. Privatization, a topic all but forbidden in polite company, would become a very hot topic of conversation by 2013-14. I have discussed why in this issue of the newsletter.
8. As some policymakers gradually became aware of the problem with the growth model and the risk of crisis, a fundamental political split would emerge between those that demanded rapid reform and those that wanted to maintain control of resources. The problem is that continuing the growth model will lead to a debt crisis, but abandoning the model will lead to much slower growth, and especially to much slower growth in the accumulation of state sector assets. This is politically very difficult for many to accept and will lead to more political conflicts over the next few years.
9. Chinese government debt will continue to balloon through the rest of this decade. Privatization is the best way to effect the transfer of wealth from the state sector to the private sector, and would be especially efficient if privatization proceeds were used to extinguish debt, but for the reasons discussed above it will be extremely difficult to do it. This means that debt build-up and the state absorption of private sector debt will continue for many years.
10. If the transition is not mismanaged, average Chinese GDP growth rates will drop to 3% for the 2010-20 decade. As my bet with The Economist suggests, this is one prediction that is still an outlier. The Economist(and many others) still believe that Chinese growth will make it the largest economy in the world before the end of the decade, but much slower growth is what rebalancing requires and it is hard to make the numbers work at growth levels much above 3%. By the way if I am wrong and Chinese growth this decade is materially higher than 3%, my prediction is that the "lost decade" of much lower growth stretch out over two decades.
11. If China rebalances correctly, then much slower GDP growth rates will be accompanied by only slightly slower growth rates in household income. In that case there need be no social instability. The political risk comes from instability at the top, not at the bottom.
12. Non-food commodity prices are set to collapse over the next three to four years. "Collapse" is not too strong a word. China's share of global demand for such commodities as iron, cement, copper, etc. is completely disproportionate to its size and almost wholly a function of its very high growth in investment. As investment growth drops sharply, as it must, global demand for non-food commodities will plummet. Collapse in Commodity Prices For years the mantra has been buy what China needs (commodities), sell what China produces. That strategy worked for a long time but that time is up or soon will be. The implication are far from pleasant for the currencies of commodity producers like Australia and Canada. Nails in the Hard Landing Coffin? One of the sillier stories making the rounds is China currency move nails hard landing risk coffin China's weekend reform of its currency regime nails shut the coffin on the last remains of doubt about whether the world's second biggest economy has successfully steered a course past a hard economic landing.
"For everybody who thought China was heading for a hard landing, it's over. This move says they are comfortable with the direction the economy is moving in," Paul Markowski, president of New York-based MES Advisers and a long-time investment adviser to China's monetary authorities, told Reuters.
Reform says Beijing is comfortable with the yuan's value and that exporters have sufficient strength to cope with the government relaxing its grip. As the financial crisis deepened in 2008, China squeezed tightly on the yuan to shield the economy as international trade ground to a halt.
It implies confidence that rebounding March indicators in the first-quarter GDP data - such as a jump in steel production, vehicle output, machinery and cement production and a recovery in sales of household electronic appliances - suggest that the floor in economic activity has broad foundations.
So does a huge bounce in new bank lending in March - 25 percent ahead of economists' forecasts at 1.01 trillion yuan - that signals monetary easing since the autumn, creating an estimated 800 billion yuan of new credit, is being put to work. The fact that China is back to the same unsustainable model certainly does not disprove the hard landing theory. Indeed, the longer China puts off rebalancing its economy, the bigger the crash later on. Moreover, widening the band on its currency is a needed part of that rebalancing, and does not preclude in any way a huge slowdown in growth. The structural imbalances in China are large and for now, still growing. However, huge cracks have appeared in real estate, and changes are coming up with a regime change. Finally, peak oil alone makes many of the growth estimates we have seen for China outright impossible. Markowski is crowing far too early. One quarter does not prove a thing. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| ECB Wants Its Pensions Adjusted For Inflation; Reflections on the Politically Entitled Class Posted: 15 Apr 2012 06:23 PM PDT The gall and arrogance of bureaucrats who should not have a job at all, let alone have a pension that no one else gets is rather stunning. Courtesy of Google translate, please consider Little faith ECB officials The personal representative of the central bank is now demanding that the employees pensions would be protected against inflation. It requires that an insurance against their own failure.
"Unfortunately, the pensions of the ECB's employees are not protected against inflation," said Carlos Bowles, a spokesman for the staff representatives, the FAS was the retirement of the ECB's staff organized a kind of pension funds.
"We do not understand why the leadership of the ECB refuses to protect our pensions against inflation," complains the Staff Committee. Even a case before the European Court was pending in this matter: A pensioner has complained with the support of the Staff Committee and the central bankers' union IPSO. Neither the ECB nor the Fed should exist at all. Both present themselves as "inflation fighters" when they are the source of inflation. Now these arrogant asswipes want to be protected from their own policies while demanding cuts in the pensions of Greece, Portugal, and Spain. Reflections on the Politically Entitled Class My friend "fedwatcher" writes ... "Nothing to see here folks! Move along."
The Politically Entitled Class always seeks to guarantee its benefits while carring nothing for the average man. Many ECB employees show up on Friday Morning to sign-in and then leave for the weekend having secured a full pay check for Friday. They work 4 day weeks, get 18 paid holidays, and 4 to 5 weeks of paid vacations plus per diem payments etc.
The Politically Entitled Class in all nations is growing. It is a cancer.
Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Mish on Max Keiser: European Merry-Go-Round, Rising Yields in Spain, Obamacare, the US Dollar, Student Loans, Gold Posted: 15 Apr 2012 10:55 AM PDT |
| Sarkozy Comeback Bid Falters as French Economy Hits the Skids; Setup Good for Gold? Posted: 14 Apr 2012 11:36 PM PDT As goes the French economy, so goes the reelection chances of French president Nicolas Sarkozy. Although Sarkozy leads in round one, polls show that lead is shrinking at a pace that suggests he will not carry round one. More importantly, Sarkozy is trailing again by double digits in polls for the decisive round two. For those not familiar with elections in France, round one pits candidates from all the parties against each other on April 22. If no one gets 50%, the top two finishers square off in round two, on May 6. Sarkozy struggles in polls as French economy sputters On April 10, Reuters reported Sarkozy struggles in polls as French economy sputters President Nicolas Sarkozy's drive to persuade voters he is the best man to lead France to economic recovery suffered a blow on Tuesday, with a survey indicating growth has ground to a halt as he struggles to make headway over his Socialist election rival.
Two weeks before the presidential elections begin, the conservative's lead over Francois Hollande is becalmed or shrinking for the first round on April 22 and he is still trailing in the runoff next month, three opinion polls showed on Tuesday.
With unemployment claims at over a 12-year high, people's purchasing power dwindling and France stripped of its prized AAA status with one credit rating agency, the Bank of France offered Sarkozy's economic record little respite.
In his manifesto, Sarkozy promised to achieve a budget surplus for the first time since 1974 and cut France's swelling debt if re-elected, warning that Hollande would lead the country towards the fate of Greece or Spain.
However, his policy of cutting the budget deficit is helping to slow the economy and hurting his election chances.
"You cannot have a tough fiscal adjustment over two years and expect strong growth at the same time," said Michel Martinez, economist at Societe Generale in Paris. Comeback Hopes Crumble In an update on April 13, Reuters reported Sarkozy's comeback hopes crumble, polls show Four polls published in less than 24 hours showed Hollande extending his lead, with the conservative incumbent's modest gains of the past month starting to evaporate ahead of a two-round contest taking place on April 22 and May 6.
A CSA poll showed Hollande winning the May 6 run-off with 57 percent of the vote. Three other polls also indicated that his chances of becoming France's first left-wing president since Francois Mitterrand were improving.
CHANGE OF DIRECTION IN EUROPE
Hollande has raised eyebrows in Berlin and other capitals by criticizing a European Union accord on debt and deficit control - the fiscal compact agreed in an effort to counter the euro zone debt crisis - and by saying he would open talks if elected to amend it with a pro-growth commitment.
"Germany understands that it cannot remain an island of prosperity in an ocean of recession," he told Les Echos daily. "The changeover in France will pave the way for a change of direction in Europe."
The CSA poll showed Hollande taking 57 percent of the vote in the final deciding round, up from a score of 54 previously.
The other three promising polls for Hollande were published by the BVA, LH2 and TNS Sofres agencies on Thursday.
The BVA poll showed Hollande winning the runoff with a score of 54 percent, up two points from a previous sounding. The LH2 poll showed him taking 55 percent of the vote in the second round. The TNS Sofres poll showed him at 56 percent, up 1 point. Hollande Promises to Rework Merkozy Treaty Francois Hollande has campaigned on a platform of making needed changes to the fragile treaty hammered out by Nicolas Sarkozy and German Chancellor Angela Merkel. Good luck with that. Meanwhile Merkel has tremendous problems of her own. When, not if, Germany's export machine collapses, it will likely sink Merkel's chances right with it. Setup Good for Gold? A Hollande victory will add pressures on the euro vs. the US dollar and also elevate fears of a eurozone breakup. A breakup is likely regardless who wins, in my estimation, however, a Hollande victory could easily escalate the timetable. If that sentiment catches hold, don't be surprised to see gold rise while the dollar strengthens. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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