Under the headline “Doomsday Outcome” a Rabobank report said that the Dutch global ag bank views the likelihood of a recession or major contraction of the Chinese economy in 2012 as very slim.
It continues that “given the Chinese government’s readiness to spend vast reserves to support the economy and to acquire agri-commodities to alleviate high domestic prices and avert social unrest, we would expect the agri-complex to remain supported, even in the case of slower than anticipated economic growth.”
The slowdown in the Chinese economy to date was engineered by Beijing through tightened monetary policy. They were concerned over heating inflation. Recent government action releasing banks from reserve constraints signaled an end to this tightening cycle.
Neither the 2008-09 financial meltdown nor the recent tightening by Beijing has stalled the growth in China’s ag sector.
Baring a hard landing, the growth in China’s ag sector is expected to continue. A hard landing would be something in the nature of 5 percent growth.
China’s leaders have described the Chinese economy as “unbalanced” and current economic trends as “unsustainable.”
Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, a renowned expert on China, defined what unbalanced and unsustainable meant at the annual DTN Ag Summit.
Lardy said that Chinese growth exceeds Chinese consumption by 25 percent. This is due to China’s enormous savings rate. In the U.S., consumers spend virtually every dime they earn. The U.S. savings rate, which has periodically gone negative, hit a whopping 4 percent when Americans were scared by the 2008-09 recession to hold onto wallets tighter.
By stark contrast the consumer savings rate in China is flirting with 40 percent, because the Chinese target their savings as they are self-insured.
If they get sick and go to the doctor they pay first or don’t get treatment. They have no health insurance. They are self-insuring, seeing savings as critical to survival and increase their savings rate when returns on savings decline in order to hit savings targets deemed necessary.
I would suspect that paying cash for health care in China lowers the cost of health care as it rations demand. That is quite different than in the U.S. where consumers take all the health care they can get thinking that as insurance covers the bill it essentially makes it free.
The enormous savings rate in China starves consumption, but creates correspondingly enormous capital reserves for banks to lend – 10 percent of Chinese GDP is now being invested in residential housing and that market is stalling. 25 percent of steel in China as well as large proportions of other construction commodities go into housing. Lardy said that China needs to liberalize interest rates to unleash consumption.
If Chinese consumers were paid higher rates on savings, they would not have to save so much principle to reach savings targets, allowing them to spend on other goods and services.
While bank lending for home real estate has increased significantly Lardy said, that it is not leveraged as here. There are no home equity mortgages available. Chinese consumers are required to put as much as 60 percent down on a second home.
That much equity is a significant buffer to a turn down in home values. After chastising the U.S. for its sub-prime mortgage fiasco, China was not going to immediately mimic that mistake.
While home values in China can decline as supply exceeds demand, there should be no mortgage meltdown as occurred in the U.S.
Lardy debunked the assertions made by Sen. Chuck Schumer (D-N.Y.) and GOP presidential candidate Mitt Romney that China’s currency was as overvalued as claimed. He noted that the Yuan has appreciated 30 percent against the dollar since 2005.
More importantly he said that the imbalance in China’s trade had declined from 10 percent of GDP in 2007 to 3 percent of GDP today. That moderation suggests that most of the currency imbalance has corrected itself and that charges of Chinese currency manipulation and trade protectionism are living in the past.
Lardy said that President Obama had met with China’s president more times than any other U.S. President and that it was paying off with results as the two countries were seeing better relations underneath all the political rhetoric.
He said that he was optimistic over the future of U.S.-Chinese trade relations, regardless of the political grandstanding that will take place in an election year.
With 40 percent of Chinese still working in agriculture, compared to 2 percent in Japan, the shift from farm to urban jobs will continue to provide workers and support continued upward mobility into the middle class fueling food demand growth.
The impression left is that while China’s economy was unbalanced and unsustainable, it is not unmanageable, and that while growth will slow to levels still envied by the U.S., China’s economic engineers were on task.
If China’s economy stumbles badly in 2012 resulting in a hard landing, it would come as a surprise to both Rabobank and Nicholas Lardy.