Well, the fallout from the latest stock market ‘correction’, this time in China, is still reverberating. However it is becoming clear. Not much has changed from the weeks and months before. The major affected major stock markets outside China are largely back to where they were. The economies that became too dependent on Chinese imports of raw materials like Aussie, us, much of Africa and South America, and many other parts of the world are still down.
Quite simply the Chinese stockmarket is such a small proportion of the Chinese economy as a leader in the Economist pointed out in “Taking a tumble“, that it’s fall was a symptom of internal confidence rather than a shift in the economic base.
So is this the hour of China’s crisis? Highly unlikely. Though the economy faces grave problems, the financial tumult is misleading. China’s stockmarket has long been derided as a casino, and for good reason. The bourse is small relative to the economy, with a tradable value of a third of GDP, compared with more than 100% in developed economies. Stocks and economic fundamentals have little in common. When share prices nearly tripled in the year to June, they no more reflected a stunning improvement in China’s growth prospects than their collapse since then has foreshadowed a sudden deterioration.
Less than a fifth of China’s household wealth is invested in shares; their boom did little to boost consumption and their crash will do little to slow it. Punters borrowed lots of money to buy stocks in good times, to be sure, and some of that debt will default. But it amounts to just 1% of total banking assets, a potential hit that, although unpleasant, is hardly systemic.
The property market matters far more for China’s economy than equities do. Housing and land account for the vast majority of collateral in the financial system and play a much bigger role in spurring on growth. Yet the barrage of bearish headlines about share prices has obscured news of a property rebound. House prices have perked up nationwide for three straight months. Two months after the stockmarket first crashed, this upturn continues.
That isn’t to say that the exchange doesn’t reflect fundamental underlying changes in the Chinese economy, it is. But as a casino, it lags a lot on the real economy. It means that the usual rush of gamblers to a new market that went bull happened. People threw their savings into the pot, and then borrowed to throw more in. Then most failed to exit early enough. Emily Rauhala at the Washington Post has an eloquent description of the classic pattern in a farming village in China (well worth reading).
For Nan, the taste of fast money has been hard to forget. His wife, Wang, wants him back in the fields, but he believes he can recover what he lost, maybe more. If he is angry, he won’t say so, fulsomely praising the local chief and the Communist Party as he compulsively checks for market news on his phone.
For me, it reminds me of the once-were-millionaires in Auckland in 1989 as they tried to get rid of assets to clear debt and avoid bankruptcy. I believe most of them also followed their ever hopeful religious beliefs and went on to supporting the Act party.
The change that has been happening in China over a number of years has been the slowing of growth, and in particular the frantic infrastructure growth that China initiated in 2008/9 as a response to the GFC. That was perfectly placed to take advantage of the lower commodity prices as the other major industrial consumers faltered, and then to take advantage of the rising markets in the west as the GFC effects diminished there.
But now the housing are built, the rail lines in, and the infrastructure is largely done. So much of the need for many of those commodity imports has diminished.
On the downside, there is little chance this [housing] rebound will translate into a big acceleration in building activity, because Chinese developers still have to work through a glut of unsold homes, the legacy of their building frenzy of recent years. But the stabilisation of prices reduces the risk of a property-market crash—an event that would be for China what a stockmarket crash would be in America or Japan.
However the external markets are full and the massive potential Chinese internal market isn’t sucking up the supply.
Investors are now trying to delve beyond iPhone shipments and gauge where China’s economy—and so the world’s—stands. In terms of global impact, a “hard landing” in China would now rival an American depression. Countries from Australia to Angola have grown richer from digging stuff out of the ground and shipping it to China. Industries from carmaking to luxury goods look to China for new business. It has been the most stable contributor to world economic growth. Will that continue?
Certainly, there are reasons to think it is in trouble. Exports are stumbling, bad loans rising and the industrial sector at its weakest since the depths of the global financial crisis. Never entirely credible, the government’s claims that the economy is chugging along at 7% now elicit derision.
At present, skeptics think that the real Chinese growth rate is in the order of 2-3%. Less than that of the US at 3.7%.
For the next few years, the bulk of the issue with the Chinese slowdown will be to do with the developing economies who have been supplying China with raw materials. Their exports and export prices on commodities have dropped and are unlikely to rise any time soon.
The Guardian has a useful simplified interactive graphic to demonstrate what likely effects on commodity suppliers is likely to be.
Needless to say, because of the John Key government’s headlong pursuit of dairy and other agricultural/forestry commodity sales in the last 7 years, New Zealand is one of the countries most at risk of slowdowns in imports from China. However we have a double whammy because our next biggest trading partner is Australia, who are just about as badly exposed in a completely different area of minerals. It is unlikely that the kiwi economy will sidestep both issues.
John Key seems to prefer us to be a developing world commodity trader, without any significiant intellectual property in the bulk of our exports. Certainly in the last 7 years, his government has systematically removed almost all of the economic inducements to develop more advanced products for selling offshore, while at the same time using the power of the state to favour dairy. This leaves us at the mercy of not only of competitors entering the low bar of dairy farming, but also to downturns in particular markets like China.
Black Monday on the casino Chinese stock markets wasn’t a particular problem for New Zealand. Living with the consequences of John Key’s short-term thinking government will be. Both us and our next biggest trading partner Australia are heavily exposed to falling Chinese imports and falling commodity prices. That is going to hurt even more than now over the coming years.