China Producing Good Numbers, but at What Long Term Cost?

china_australia660

Why is it that we want to believe so badly?

Most of the western world has just celebrated the Easter break. It’s meant to be a celebration of Christ’s death (on Good Friday) and rebirth (on Easter Sunday).

For such a world defining event, you’d think we’d have the date of it nailed, wouldn’t you?

Instead, it changes every year. That’s because Easter is a pagan seasonal celebration, hijacked by the Church to make it a religious celebration.

The actual day of the celebration of Christ’s death depends on the date of the full moon after the Autumn equinox. In the northern hemisphere, the equinox indicates the time where the sun swings back over the equator and ushers in longer days and the rebirth of nature (spring).

If you had just spent the past six months freezing and existing on stored crops, you’d celebrate the changing of seasons too.

No wonder the early Church was happy to use the date for its own story of rebirth. And there were clearly enough willing believers to quickly make it the dominant reason behind the Easter celebration.

I thought of this need to believe in something after reading an article in the Financial Review about Donald Trump’s recent backflips:

Donald Trump’s palpable tiptoe towards mainstream economic and foreign policies illustrates a president lacking firm ideology and trying to reshape his vitriolic campaign rhetoric to the reality he presides over.

Trump’s shameless recent backflips, partly away from populist nationalism, pose a tantalising question for Americans and the rest of the world trying to understand the direction of the US President.

What does Trump actually stand for?

Donald Trump stands for Donald Trump. It’s as simple as that.

That people actually believed otherwise is a testament to just how desperate humans are to believe in something…anything.

After all, we happily accepted that Jesus was born to a virgin, died on the cross, and rose from the dead three days later. The fact that believers of this story were promised everlasting life in heaven made its sale that much easier.

If a great swathe of humanity bought this story, then Trump’s election rhetoric to build a wall along the Mexican border, slap 45% trade tariffs on China, pull back from international conflict and sack Fed boss Janet Yellen sound absolutely plausible.

But now it’s apparent that Trump is just like all other politicians (hungry for power and willing to lie to get it) I wonder what the blowback from the ‘heartland’ will be? After all, these people genuinely believed his rhetoric. They don’t want to know that Easter has its roots as a pagan celebration, and that Jesus didn’t really rise from the dead.

Well, now they’re getting a taste of it. How Trump manages the conflict between the realities of politics and his nationalist rhetoric will be fascinating to watch.

Three ‘Big Money’ Sectors Aussie Investors Cannot Miss in 2017

China’s New Boom

Download this free report right now and discover the three sectors to watch as China’s growing population demands more Aussie products than ever before. Fill in your email address in the box below and click ‘Send My FREE Report’. PLUS you’ll get a free subscription to Money Morning.

We will collect and handle your personal information in accordance with our Privacy Policy. You can cancel your subscription at any time.

China maintains the growth (façade)

China’s one for the true believers though. The central planners in the Middle Kingdom just keep on delivering. On Monday, it reported its fastest pace of quarterly growth — 6.9% annualised — in 18 months.

That’s largely thanks to stimulus measures put into place last year, which have put another rocket under the property market. While it’s all good in the short term, China is simply building up long term problems to keep the economy humming along.

The single-minded focus on state directed infrastructure spending means the economy is now dangerously reliant on the property sector. According to the Wall Street Journal:

China’s property industry now accounts for between 25% and 30% of China’s gross domestic product, including related industries such as construction, according to DBS, a Singapore-based bank.

The problem is that China really has no other options. It recently announced plans to build a brand new city, just south of Beijing. That sparked a frenzy of activity. From the Wall Street Journal again:

XIONGAN NEW AREA, China—When the Chinese government announced plans earlier this month for a new megacity a two-hour drive south of Beijing, instant gold fever erupted.

Fan Yushou, a 36-year-old businessman from Chongqing, about 1,100 miles away, hopped in his car as soon as he heard about the plans and drove for 20 hours. Home prices in the area more than doubled in the days after the April 1 announcement. Local media reported one Beijinger arrived with a trunk full of cash to buy apartments.

They all wanted a piece of the Xiongan New Area, billed in state media as an “ecocity” led by innovation and high tech set to rise from a swath of farmland and plastics factories—the epitome of the new model of growth China aspires to.

It’s a 15 year project apparently, and will be good for Australia’s iron ore industry. But the flipside is ever-increasing debt. Total debt in China is now approaching 280% of GDP. That’s dangerously high for a developing economy.

The thing is, it could keep on growing for years. We simply don’t know when enough will be enough. All we know is that in a historical context, it’s dangerous…and getting worse.

The great hope for China is that consumers will come through and eventually provide the growth that the government is now giving through its infrastructure spending.

But that’s going to be hard to achieve. While consumer spending is strong, it needs to get much stronger to offset any decline from the infrastructure sector. Whether China can engineer such a feat is questionable.

The other issue to consider is China’s debt levels. As most of the debt in China is internal (it’s not borrowed from foreigners) the Chinese are basically borrowing from each other.

The household sector is the largest supplier of savings, and has effectively lent these savings to the government and corporate borrowers over the past few years. It’s going to be very difficult for consumers to increase their borrowing to such an extent that it will offset reduced government or business borrowing.

Despite these worries, China’s government has managed to generate decent growth and avoid any debt blow ups…so far. There’s nothing to suggest they can’t continue to do this for years to come.

And while national anxiety levels around Australia’s housing market are reaching all-time highs, China’s successful central planning is good news for our economy. Because while China remains strong, commodity prices will remain at healthy levels, so our economy should continue to keep its head above water.

And that means the housing crash that everyone is waiting for will continue to remain elusive.

Regards,

Greg Canavan,
Editor, Money Morning

Greg Canavan

Greg Canavan

Greg is the Managing Editor for Money Morning. He helps investors preserve their wealth over the long term using a method known as value investing. Lucky for Money Morning readers, he imparts some of this knowledge on them three times a week with editorial spots.

Greg Canavan is a feature Editor at the Money Morning and is the foremost authority for retail investors on value investing in Australia.

He is also the Editor of Crisis & Opportunity. An investment publication designed to help investors profit from companies and stocks that are undervalued on the market. Greg is the former head of Australasian Research for an Australian asset-management group and has appeared on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. He has written articles for The Sydney Morning HeraldThe Australian and www.ninemsn.com.au. Greg’s aim is to help you create a portfolio of stocks based on sound, proven, investing principles. His system for identifying stocks trading beneath their ‘intrinsic’ value combines a big picture understanding of the financial markets with a thorough valuation analysis of individual securities.

Greg’s method of investing is not about taking huge risks and rushing into big positions. He investigates highly profitable companies trading at a reduced premium to their net asset value, or ‘equity’ value as he puts it – and passes that research on to his subscribers to incorporate into their financial plan as they see fit.

With Greg’s help, you can implement a long-term wealth building strategy into your financial planning, be better prepared for the tough financial challenges ahead and stop making the basic, costly mistakes that most private investors make every time they buy a stock.

To find out more Greg’s investing style and his financial worldview take out a free subscription to Money Morning here.

And to discover what a company’s profitability reveals about its true value…and more importantly how you can use that knowledge to become a better, smarter investor, take out a 30 day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Leave a Reply

Be the First to Comment!

Notify of
wpDiscuz