1# 何鸿燊
http://www.minyanville.com/articles/print.php?a=34443
The single most important thing to understand about China’s economic growth in the past five years is that it has been enabled, and to some extent driven, by extraordinarily high growth rates of extremely cheap credit.
The problem is that the credit “music" is about to be interrupted due to well-founded concerns about accelerating inflation. The consequences will likely be quite unnerving for domestic and global financial markets.
China’s New Dilemma: Goldilocks No More
For the first time in its history, China faces a dilemma which involves the interplay between wages, inflation, credit and economic growth.
The first aspect of this problem is that the supply of labor in China is no longer as boundless as it has been for the past three decades. While foreign demand for cheap goods was met with a virtually unlimited supply of cheap capital and cheap labor to produce those goods, the result was a “goldilocks” economy of 10% growth with low inflation. However, times are changing.
Labor shortages are already acute in some sectors and wages are rising spectacularly in a few key manufacturing areas on the east coast. These well-publicized wage increases are significant because wages in China have already been rising much faster than average productivity growth throughout the economy, and the trend has been accelerating. At the same time, due to both external and internal forces, prices for everything in China are rising, particularly basic consumption items such as food. Therefore, for the first time in its history, China faces the real prospect of a wage-price spiral.
Let me be clear. China still has considerable labor resources in the countryside that will continue to migrate to the cities. However, due to the increasingly elderly demographic profile of the population that remains in the countryside, the rate of this internal migration will slow. This means that, all things being equal, the non-inflationary rate of economic growth in China must also slow.
Labor shortages are not only a function of slowing internal migration. China’s economy is qualitatively transforming at breakneck speed. As a result, mismatches are developing between the skills required by business, and the skill sets of available workers. This tends to create high unemployment/underemployment in some population cohorts while wage inflation becomes a problem in some sectors where compensation is rising faster than productivity.
The fact that China’s labor resources are becoming relatively more scarce creates an intractable dilemma. For any given level of demand, the supply will be limited by the growth of productivity. The only way that China can avoid a wage-price spiral will be to enact policies that have the effect of cooling off aggregate demand to a level that runs at or below the growth rate of productivity. Since labor productivity cannot reasonably be expected to sustainably grow at rates of 9%-10% per annum, this inevitably means either or both: 1) Long-term rates of economic growth rates in China will slow, or; 2) spiraling inflation.
What Will the Chinese Do?
Chinese Communist Party leaders have taken due note of the social and political unrest sparked in MENA countries due to steep price rises of basic consumer items. They will be keen not to repeat the same experience.
China’s economic model, which has produced steady 9%-10% per annum growth rates for around three decades, has been based on supplying property, plant and equipment to a seemingly endless stream of laborers migrating out of the countryside and into urban areas. It has been a classic case of early-stage investment-led growth, and it has been enabled, and to some extent driven, by extremely cheap debt. This model was capable of producing a goldilocks economy as long as the labor force was unlimited and there were no other supply constraints.
However, as the supply of property, plant and equipment rises in quantity and quality relative to the available supply of labor in some sectors, wages will tend to rise. Furthermore, China’s demand for investment goods has driven up the price of all kinds of commodities within China and around the world, creating inflation pressures within China.
Since excess demand for investment goods is largely responsible the inflationary pressures in China, officials there will have to address it. And since China’s model of investment-led growth has been enabled, and to some extent driven by, dizzying levels and growth rates of extremely cheap credit, the cooling off of investment-led growth will necessarily involve restricting access to cheap credit.
Chinese officials will have to address excess investment growth for other reasons. First, overproduction in certain sectors is creating dangerous imbalances. For example, commercial real estate investment is creating gluts in some areas. Just as importantly, Chinese industrial capacity in export-oriented sectors face problems of massive overcapacity. This is particularly true since China’s export growth is destined to slow. China’s major trading partners have warned that they can no longer afford to absorb China’s massive current account surpluses caused by predatory trade and currency policies. Thus Chinese investment in export industries, which has been a key driver of economic growth in recent years, will inevitably need to slow.
Whatever way you slice it, China needs to slow the rate of investment growth. And in effect, this means slowing the rate of credit growth. Money and Credit
The notion that inflation is a monetary phenomenon has become trite. However, it is true, only to an extent. And to the extent that it is true, it is so for reasons quite different than most people think. Most people generally conceive of inflation as a function of money growth and the latter as a function of central bank printing operations. This paradigm is false.
One problem created by this false paradigm is that many people are under the incorrect impression that central bank officials can easily control the money supply and inflation.
In modern economic systems, money is credit. Money is created primarily, not by the central bank, but organically by the banking system as a function of the evolution of the demand and supply of credit.
For that reason, for most purposes, it may be more useful to think of inflation as a credit phenomenon, rather than a money supply phenomenon. In this chicken-egg dynamic, credit generally comes first and is the driver of money growth. Central bank policy is typically reactive.
It is important to understand this when contemplating the causes of the extremely high rates of money growth in China and the relationship of these money supply growth rates with past and future rates of inflation. M2 has been growing at a rate of near 20% for several years in China without causing high inflation. Such an outcome contradicts simplistic monetarist or quantity theories of money.
The key to understanding the apparent disconnect between money and inflation in China in recent decades lies in realizing that in modern economic systems, money is credit. And to the extent that the demand for capital or labor resources enabled by the expansion of credit did not outstrip the available supply of these resources, then the expansion of the money supply could be accommodated without producing inflation.
However, as pointed out, China is starting to face labor and other resource constraints. In this context, excess money growth will become inflationary.
It is therefore clear that the only way to prevent inflationary money growth and associated excess aggregate demand in China that has been driven organically through the financial system is to restrain the growth of credit.
The problem is that there is no way for the Chinese to ensure that the slowdown of credit growth can be implemented in a tidy fashion. Economic theory and history teaches that even a small contraction in credit in one subsector of the economy can have massive ripple effects though the entire economy via the money multiplier phenomenon, which works in reverse whenever credit and liquidity in one sector contracts. A one-yuan decrease in liquidity available to one sector could result in a several-yuan contraction of liquidity throughout the entire economy. Small credit contractions in key areas can cause entire economic sectors of the economy, and even the financial system as a whole, to seize up.
The Dependence of China’s Economy on Cheap Credit
I project that China’s economy will prove to be extremely sensitive to efforts to reign in sectoral and/or systemic liquidity. This is due to the extreme dependence of the Chinese economy on the rapid growth of credit. In recent years, the dependence has become so great that it has required more than one yuan of credit growth to produce one yuan of GDP growth. As a result of this level of dependence any restriction in credit will likely result in a disproportionate and extremely rapid slowdown in growth. And due to money multiplier effects, I project that the impacts of liquidity restrictions in limited subsectors of the economy will have outsized, unintended and unpredictable effects throughout the economy.
Ultimately, I believe that Chinese authorities will be able to effectively deal with emerging liquidity issues in the banking system and the real economy. However, I believe that “fine tuning” will prove exceedingly difficult. As a result, I believe that there will be some scary moments. In particular, toward the middle and latter half of 2011, I expect activity in a few sectors to decline precipitously for a short period. A few scary data points will likely trigger global fears of a Chinese hard landing.
One of the focal points of the scare could be the real estate sector which, due to its reliance on cheap credit and its vulnerability to speculation, could suffer a major slowdown with concomitant negative impacts on the Chinese financial system, the construction sector and provincial government finances.
As I explained in my most recent articles on China’s housing sector (see two-part series, China's Housing Bubble: Mainly Hot Air), real estate per se is neither the main root of the problem nor will it be the catalyst of China’s coming economic downturn. The real estate economy will just be one of many victims of an adjustment process in which aggregate credit growth must be restrained to comport with a substantial lowering of the sustainable level of the non-inflationary rate of Chinese economic growth. However, the point is that the adjustment process in credit-sensitive sectors such as real estate will feed back directly into overall economic growth. Managing this adjustment process in ways that are not traumatic in the short term will not be easy.
Conclusion
I believe that the Chinese government has extraordinary economic, financial and political resources that should allow it to head off a severe hard landing for the economy in the medium and long terms. Thus, I do not expect China to suffer a deep or prolonged recession.
However, not even the Chinese government can control the vagaries of liquidity shifts in a modern economic system characterized by fractional reserve banking and the relatively free flow of capital. Liquidity-driven problems in this context can bring businesses and whole sectors of the economy to a freeze in the blink of an eye.
The Chinese economy is particularly sensitive to any changes in liquidity. As a result, I think investors will face some scary moments in the coming months related to fears of a possible hard landing in China. Commodities, in particular, from oil to metals, should get hammered.
China-sensitive stocks and ETFs should be avoided in coming months. Direct plays such as (FXI), (HAO), (TAO) and (YAO) are likely to get hit hard. However, indirect plays such as (EEM), (VWO), (ILF) linked to emerging markets, and commodities plays such as (DBC), (DBN), (MXI), (HAP), (XLE), (XOP), (IEO), and (USO), will also get slammed.
Investors can consider buying hard-hit sectors such as these when blood is in the streets and everybody is saying that China’s bubble is bursting and that the country’s economy will enter into a deep and prolonged recession. Remember that problems that are caused by restrictions of liquidity can almost as quickly be resolved by injecting liquidity. And this is something that the Chinese know how to do quite effectively.
China’s long term outlook is strong. It is the outlook for the next few months that I believe investors should be wary of. |
发表于 2011-5-10 08:11
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