A gloomy Look at the Global Canvas
|Our Correspondent||Oct 16, 2007|
The Economic Time™ is worsening. We have been bleating on about this for a good year; the IMF has just caught on and has revised down its global growth forecasts. The excess demand for money is intensifying in the US and in Europe – but from a very different angle.
While the Central Banks are not generous in supplying liquidity, Japan included, the key is that banks don’t want to lend! Any reduction of interest rates cannot get banks to want to lend more. I reckon with stagflation in the US, all of this means that the earnings outlook must be souring: turnover is down and unit labour costs are rising, thus reducing margins.
Market crash in the offing? As just suggested, The Economic Clock™ is worsening in the G-3 Maybe punters will move out of denial and (finally) accept this? Perhaps soggy earnings reports will jolt people out of denial?
October and Sevens have never been happy combinations. Also, traditionally the Chinese markets have slid after the National Party Congress (NPC) adjourned on 18th September 1997 (another bad “seven”!), and 15th November 2002
So, with this year’s 17th NPC ending on Sunday, 21st October, will there be a “Black Monday” on the 22nd?
We are not of the “new school” which believes that it’s different this time. Indeed, Winston Churchill taught us that the further back you look, the further forward you can peer. Every 1 percentage point drop on Wall Street translates into a 1.4 percentage point drop in Shanghai.
So: will Wall Street drag down Shanghai and Asia, or will Shanghai drag down Wall Street and Asia? Who is wagging whom this time?
The difference is that this time, global investors have a greater choice of where to put their money. Before, it was just the US and illiquid, small Asian markets. Now, Asia is creating choice via increased market size.
Commodities will continue booming thanks to emerging China and India needing more metals and minerals, and thanks to pollution and El Nino driving bad weather and thus bad harvests.
Currencies. The dollar will continue going the way that all super-power currencies must: down. So we are banking on the commodity-driven Australian dollar, as 60% of that country’s exports go to China, and on the high yielding pound. We also like the euro – more because it is a natural switch from the dollar, given the size of the euro’s market. Besides, I think that while US rates will head down, thanks to "we are friends of the traded Asian currencies - even if they are giving headaches to Central Bankers.
Burma. We all know that China is the big ally of Burma, if for no other reasons than defence. I do not follow Tibet, so have no qualified views. But, I can suggest that Burma is yet another wake up call to Beijing that it must keep creating jobs – or it will be out of a job!
Social unrest in China is rising, for all the right reasons: people expect more of their governments, and they are pressing local governments to do more to help them
Burma is a bigger tinderbox in that the army killed/imprisoned monks AND in that the government is terribly secretive. The best example is that the “capitol” is remote. View Burma as Southeast Asia’s “North Korea”.
The big difference to China is that in China, government officials increasingly are “accountable” to the people – hence the undulating social unrest. So, my take is that while Burma will have the occasional eruption, China’s social unrest will undulate, like waves. Grass roots” democracy, i.e. locals having more of a say in how they are governed, is taking root in China. And the rule of law will rise in proportion to private property ownership among the middle classes.
So I cannot compare the two. I am not worried about China: Beijing has to keep creating prosperity! I don't sense that the Burmese government has this mandate from the people.
Social unrest in provinces, corruption, ongoing urbanization:
Corruption exists everywhere; we are just less sophisticated in the East! Social unrest is a sign of a maturing society – and that goes hand in hand with urbanization and lacking property rights. Simple example. Mr. Wu owns his car. Mr. Tsang bangs into it. Mr. Wu now wants to be compensated for Tsang’s follies. How can Mr. Wu force Tsang to pay?
The BIGGEST issue has to be governability. The headline stuff is about who will occupy the Standing Committee of the Politburo, but I think that this matters less. Regarding Beijing, “the emperor is far away and the sky is high”: China is caught up in Kenneth Lieberthal’s “matrix muddle”, meaning that all too often, there is no “one” decision-maker who pulls the trigger.
This means that the real issue is: how can Beijing tighten its non-grip over the provinces? Forget broad policy statements if they cannot be implemented at a local level!
Encouragingly, and totally contrary to our leaderless Hong Kong in this regard, Beijing is getting tough on the environment. Thus, Beijing recently cracked down on Mengniu Dairy (in which my company owns shares): see the attachment. What is fascinating is not only that our “leaders” in Hong Kong are too gutless to do similar things to polluters here in HK, but also that Beijing is imposing its will on the provinces! And crucially, that it can do so is extraordinary.
Olympics: Traditionally, markets run up to the Olympics. Thus we remain fundamental China bulls – once the mini-crash has occurred, buy on weakness.
Certainly these Games are exerting pressure on Beijing to get tough on the environment .
Most recent trade disputes: If Congress keeps irking China, I would not be surprised to see China making life harder for US multinationals operating in China. Already Mattel has been humiliated.
Rumour has it that the Americans were yelling at China because their own toy sales were plunging in the USA
The worse that The Economic Time gets in America, the louder protectionist sentiment will get...