According to the Financial Times, the Australian mining group Fortescue has moved into expansion mode on the back of robust iron-ore prices that are now at an eight-month high. The reason for the rebound is the reflation efforts of the Chinese government after China experienced a relatively hard landing in property and shares, prompting China to give up on its plan to rebalance the economy.
The FT reports: that “the cost of the commodity used in steelmaking has risen almost 60 per cent since early September as Chinese steelmakers restock after running down their inventories during the third quarter of the year.” This is testament to the about-face China has taken when faced with the consequences of the malinvestment of the previous debt binge.
In November, analysts were cheered by economic data out of China which showed a pickup in the non-manufacturing sector after growth had hit a three-year low China is now on track to its 8% growth using official numbers, with industrial output up 9.6% in the year through October and retail sales up a spectacular 14.5% year-on-year. The question for China watchers is whether China is over the hump and poised for continued growth after hitting the wall earlier in the year. And the answer seems to be yes because of government stimulus despite the lingering ill effects of the last stimulus round.
The South China Morning Post writes that:
Massive spending on infrastructure projects is being undertaken by provincial governments, such as 829.2 billion yuan (HK$1.02 trillion) by Changsha, the capital of Hunan province, and a 3 trillion yuan stimulus by Guizhou province announced in July, despite the fact that provincial or municipal governments are still grappling with the legacy of the 4 trillion yuan package the central government launched between 2008 and 2010.
“It was actually much larger than 4 trillion. The 4 trillion was just a number announced. It was a massive expansion of bank lending. The size of the banking sector has exploded to double in the past three years,” said Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing.
The government announced the 4 trillion yuan stimulus, but 12 trillion yuan was actually raised, mostly through local governments, Xu Chenggang, an economics professor at Hong Kong University, said.
At present, there is between 8 trillion and 9 trillion yuan of outstanding loans from that 12 trillion yuan raised for the stimulus, Xu estimates. Most of the money for the stimulus came from loans to local governments, which used land as collateral, he said.
“The central government has been trying to push down land prices. If land prices come down, either banks or local governments, or both, are in deep trouble. They still have to pay back their loans. Now banks are not willing to lend, as they are already in trouble.”
Most of the nation’s credit was locked up in projects with poor returns, Chovanec said. “When banks don’t get paid back, they don’t have money to make new loans.”
New loans by the “big four” state banks fell to 166 billion yuan last month from 220 billion yuan in August, the 21st Century Business Herald reported.
The stock market in China has yet to recover despite the renewed round of stimulus, with stocks near a 4-year low.
Interestingly Paul Krugman warned in 1994 that the fast growth of the so-called Asian Tigers had similarities to the Soviet growth model and was unsustainable unless it was accompanied by efficiency gains. Krugman made his call 3 years before the Asian crisis hit and China was not among the countries he was highlighting. But now, Charles Dumas of Lombard Street Research is bringing back the Krugman thesis and pointing to China because he believes all of China’s growth in 2012 is due to capital inputs and none of it now comes from efficiency gains, in sharp contrast to the past. Dumas believes that a failure to rebalance the economy in order to make the adjustments that will allow efficiency gains will mean trend growth slipping to 5%, a build up of debt, and bouts of inflation. Basically, China’s overinvestment is now catching up to it. Households have borne the costs of this via a socialisation of losses and a suppression of real interest income but this has caused China to continue to rely on export growth to fill the gap.
For now, China is back to high growth rates. If the situation in Europe and the US does not improve however, things could be different. Government stimulus can only go so far.