Tuesday 7 April 2009

GLOBAL MEANS EVERYONE: CHINA TOO

I have just returned from a week in South Africa training bank executives and discussing with them the way in which the credit crunch and global downturn is spreading. I said Africa is only the GDP size of Belgium, 1% of world GDP. South Africa with over four times the population of Belgium is only half the GDP of Belgium. For some listeners such comparisons are quite contrary to their subjective assumptions about what is real in the world. At another end of some similar perspective is China. Its economy is larger than Italy's but only just about the size of France, but onl;y if you accept the official figures with minor adjustments for error.
Political geography and fiscal and monetary degrees of freedom that any one country can muster is no protection ultimately from the worst of the crisis. I said i expect even China may fall into recession this year, and if it can so can anyone. China was also a bubble economy even if it is the surplus trading counterpart to the US bubble. Trading surplus is not a bellweather measure of fundamental economic growth. That said, the US, UK and other credit-boom deficit countries have clearly produced a major filip for trading partners like China and this has been good on balance for poorer developing countries. But, just because they were trade suplus-earning dfoes not means they are better placed to survive or ride-out the global crisis! China also needs a stimulis package, proportionately one much bigger than the USA. It has at least the foreign currency reserves to leverage this. Other countries do not and they need external assistance. The GDP growth of China is very impressive even if it reflects considerable and crude PR artifice in national income accounting whereby the growth rates have really been about one third less than advertised and inflation accounting is circumspect. This year and last year are the first since records began when the aggregate of the world's economic growth is negative. In countries where growth is currently positive it is not tenable to make plans on the presumption that this dissonence is sustainable. No place can remain positively disconnected. There has been a delusionary presumption that some countries are too insignificant to register on the radar of the world's markets, that the richer the country the worse matters are going to get, while poor countries may just cruise along and by the time the shocl-wave reaches them the rest of the world will alreday be well underway in fixing the problems.
According to the World Bank: "What began six months ago as a massive de-leveraging in financial markets has turned into one of the sharpest global economic downturns in recent history." That is a mild and optimistic statement. Hans Timmer, manager of World Bank Global Prospects adds, "Even with a return to positive growth, the problems that are being created at the moment because of the sharp fall [in growth] will remain with us in 2010 and 2011." Also, relatively optimistic in my opinion, though it is meant as a warning to countries maintaining some false confidence.
OECD, representing the world's richest nations, has a gloomy forecast that predicts global trade will shrink by more than 13% in 2009. That is obviously an under-estimate in volume terms given that petroleum trade, which is half of world trade has fallen by more in $ price and not the only commodities to do so compared to last year. The dramatic volatility in investment flows and interbank lending combined with major falls in demand by major importing, trade deficit countries will so disrupt the pattern of world trade that the uncertainties produced must have at least a 15% negative growth effect. If world trade, which is mainly denominated in $ dollars, falls by 13%, it is possible to envisage the volume of world trade falling by 20% after taking account of a 30% rise in the $ exchange rate. However, it works out the disruption to the pattern of trade will be traumatic round the world.
Klaus Schmidt-Hebbel, OECD Chief Economist said, "We are in the midst of the steepest, most synchronized recession in our lifetime, certainly since the 1930s." It will reach even to Chongqing, the world's biggest city by population, 33 millions, deep in the inland heart of China with an economy roughly that of Manchester, England. The Chinese started out sometime not long ago with only 20% of the poulation in cities and towns ('urbanised'). Present trends suggest 70& urbanised by 2040 roughly. This urbanisation has been the single biggest factor in China's growth, pulling 200 million into the cities and eventually nearly twice this. It means that many people brought into urban economy where every transaction, every action, has to be mediated by money. Continuing alonmg this trend means building as much metropolitan townscape again as currently exists. That is not physically possible from an infrastructure and services perspective. Nor is it in political-financial systems terms possible. For these reasons alone China cannot maintain its recent growth trajectory. Ans, in fact, it is now taking steps to try and stop the inward migrations. There are even signs of return migrations; the shock of big city delights is not pleasing to everyone. China has an advantage compared to most developing countries by having a large number of major urban centres (USA has a world-beating number of 80), but it lacks the balancing between all these of a sufficiently developed and complementary range that it can internally generate the domestically redistributive growth that development economists and now G20 are talking of globally. The credit crunch and global recession will variously hit China and its centres and regions much as the wave is rippling through the wider world. Like the World Bank, OECD also expects economic contraction to be worst for the wealthiest parts of the world (w.g. OECD countries which means three-quarters of the world economy by value if only a fifth by population), falling by over 4% (= a loss of two weeks of annual income and spending). That, they say, would be the "deepest and most widespread recession in 50 years,." UK is expected to shrink 3.7%, U.S. by 4%, Germany 5.3%, and Japan by 6.6%. The latter two are especially export-dependent for their GDP numbers, but so too is China. China may well experience recession in 2009, but will we know that; will the Chinese government permit the official figures to show that? It is bad enough that US official figures show the following: But jobless figures and trade protection may be the least of the issues that can cause sufficient stress and strain to lead to warfare. Robert Zoelick, President of the World Bank, is so worried that he thinks we could see an upsurge in warring and violence on the streets. "These events could next become a human and a social crisis, with political implications. People in developing countries have much less cushion: no savings, no insurance, no unemployment benefits, and often no food. There is a greater risk in doing too little than in doing too much. No one can be certain whether these packages offer enough stimulus for a long enough time."
That is one reason for the G20 pledge of an additional $1.1 trillion of stimulus money from the 20% of people enjoying 80% of world income to the 80% of the world's population not enjoying only 20% of world income. What some extremely prudential commentators argue against this is that you can't borrow-and-spend your way to prosperity. These commentators (and their political representatives who cut the G20 package from $2 trillions to $1.1 trillion) think such sound-bites are pearls of wisdom, but clearly are no students of economic history, which points entirely the other way. I could go further and say there is no such thing as 'spending' without 'borrowing'. Spending only out of income is thought by some to be the route to growth by transferring income from less productive activety into investment into more productive activety and forgets that excess income is mostly saved or spend on acquiring assets, not on reinvestment into new production. This is why we have banks who take assets as collateral alongside savings and convert these into investment spending loans. If you decide credit and borrowing is not the way to go, then you risk other means that people will resort to for equality of opportunity. The extent to which everyone relies on banks one way or another is surely a measure of the extent that we all have to borrow to grow. The opposite theory presumes that only those who generate excess savings have the right (not necessarily the duty) to be the only ones to invest in new growth.
One US investment curmudgeon said to me, "Heck, all it took was massive government spending to cure a comatose economy, Russia would be ruling the world today... you and I know better than that?" Er, um, no. The USA may be a quarter of the world economy, but it strikes me that they don't seem to know that money comes in many flavours, in different currencies. The same pundit tells me that, "If yall wanna invest in countries with a positive balance of trade, don't spend more than they make, and think yall can still have growing economies." Trade supluses do not a world economy make, not least because any currency earnings cannot be spent just anywhere as if they are all domestic value money. The US economy may be shrinking by anything up to about 6% this year while according to the World Bank, China will grow by 6.5% in 2009. This does not mean shedding U.S. assets and loading up on Asian stocks. The US $ exchange rate has risen fast even as the economy is touching bottom. China is shrinking and that alone plus likely devaluations may in $ dollar terms make an investment shift from US to say China lose money. The reverse may also become true. The problem is that the currency denomination of gains and losses is unpredictable when currencies are realigning by larger margins than GDP growth rates. China's economy is about one seventh that of the USA by value and that may include some exaggeration on the Chinese data side. It is inconceivale that China, whose GDP estimate for 2009 was 9.6% in September 2008 and 6.5% today, will not be 3% shortly and possibly zero or negative by year end. It shares the same world as other countries and has good reason for proposing one of the biggest fiscal stimulis packages on the planet. My US pundit forgets to notice that the Chinese stock market index grew 400% from 2005 to 2008 having doubled from mid-2006, but that this coincided with massive growth in domestic day-trader speculation and a relaxation of bank reserve requirements plus lower interest rates, which then all had to go rapidly into reverse to try and get excess liquidity out of the market i.e. this was also a credit-bubble boom, and consequently the long run growth rates and other charting assumptions are unreliable. It is a point worth making again, share prices are moved by frequency of direction of buy sell orders more than by volume or value. It is a confidence and belief matter more than one of fundamental value theories. It is part of the anxiety of US investors that they can be enticed into believing foreign markets are somehow more real than there own. The professionals know better.

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