China and the Australian Insolvency Market (Updated)

UPDATE:

Some evidence of what a (slight) slowdown in urbanising China might have on the Australian mining sector shows up in BHP’s last half year ended 31 December 2011.  It seems that growth on the already urbanised fringe is slowing, and moving inland (with some exceptions).  The following summary from First Samuel (link) tells the tale:

BHP Billiton’s result for the half year ending 31-Dec-11 was strong in the commodities of thermal coal, petroleum and iron ore – with each showing high revenue and earnings growth. Iron ore production hit a record annualised production rate of  178m tonnes per annum, and now provides BHP with over off of its earnings.

However BHP didn’t quite reach the expected overall profit target (US$10bill+). Cost and pricing pressures impacted  Aluminium’s performance, lower copper grades and industrial activity impacted Base Metals’ (copper) performance, and metallurgical coal was impacted by the Queensland flood legacy and industrial activity.

BHP expressed short term caution, given the uncertainty created by the situation in Europe. However, it highlighted  that the structural drivers of industrialisation and urbanisation in the developing world underpin commodity demand in the medium to longer term.

Source - BHP

BHP’s chart shows that the urbanisation of  manufacturing capabilities that exist in coastal provinces are moving inland, extending high GDP growth across more of the country.

At some point there will be no territory left  to sustain the pace of  urbanisation and we will have to hope India or Africa (where many low wage manufacturing jobs are now going) takes up the slack.

ORIGINAL ARTICLE:

Over summer at the beach I had the opportunity to read some interesting material on the Chinese economy.

The Australian economy driven in large part by demand for our raw materials by China.  China is now our largest trading partner and it is the first time that the position has been held by a non western, let alone a non democratic, nation.  The fact that China remains a dictatorship presents a greater degree of risk to us that our reliance on fellow minded nations in the past, in Britain and the USA.

I have sometimes wondered (as a insolvency practitioner) how likely it is for the China boom to continue, at least at a pace sufficient to keep resource prices sky-high, and the Australian economy afloat.

One of the more extreme predictions I read was in “The Coming Collapse of China”.   The author, Gordon Chang, sets out a long lists of reasons why the economy in China is in trouble:

  1. The current leadership has backed away from economically progressive policies;
  2. The GFC has killed growth in China’s export markets;
  3. The one child policy will from 2014 result in a falling absolute working age population, undermining China’s chief advantage of low priced  labour;
  4. Internal inflation reflected in asset bubbles, high price inflation following the GFC stimulus package in China.

Chang predicts a slowdown (Japan style) or crash will follow.  But when and how?  This is what I found interesting:

Today, social change in China is accelerating. The problem for the country’s ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party’s leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

This phenomenon, which has swept North Africa and the Middle East this year, tells us that the nature of political change around the world is itself changing, destabilizing even the most secure-looking authoritarian governments. China is by no means immune to this wave of popular uprising, as Beijing’s overreaction to the so-called “Jasmine” protests this spring indicates. The Communist Party, once the beneficiary of global trends, is now the victim of them.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership’s sluggish response in recent months — in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad — indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month’s “open revolt” in the village of Wukan in Guangdong province, people can organize themselves quickly — as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution.

Paul Wolfowitz, former head of the World Bank, architect of US policy in the second Iraq war and expert on Asia, gave an interesting speech on the same topic (link to the video of his speech) last September in Australia.  He compares the situation in 2011 to the world economy in 1900 and identifies a challenge – that is ensuring China can be integrated into the world economy as an emerging great power without sparking upheaval or war, as Germany and Japan did.

Regards

Mark

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s