China Is Down But Not Out - And Steeling For A Revival
Sydney Morning Herald
Wednesday November 26, 2008
BHP Billiton was the last of the big miners to accept that the Chinese economy - and therefore the global commodities market - was in trouble.
Last night it switched its bets from "China can't stumble" to "China won't recover any time soon".By the second quarter of next year it will become clear whether the giant miner was wrong both times.The Chinese economy is indeed in trouble and the bits that are hurting most happen to be the heavy industries that have driven the five-year long commodities boom: steel, aluminium, machinery, power generation.But most local-based analysts believe the Chinese Communist Party's sudden and mammoth effort to turn the economy is likely to succeed.The sector of the economy that the state can most easily reach with its 4 trillion yuan ($920 billion) rescue package is heavy industry, because it is dominated by state-owned enterprises.The central government has a balance sheet strong enough to directly fund huge building projects which will revive demand for iron ore, coal, copper and aluminium. It can, and will, leverage its own spending by leaning on state-owned enterprises and especially state-owned banks to open their vaults to the patriotic cause of spending money. More importantly, China's provincial and local government officials don't need any encouragement to spend money - they only needed to be let off the leash.Hotels outside China's central planning agency, the National Development & Reform Commission, are said to be overflowing with provincial officials carrying briefcases full of plans for freeways, dams and shiny government office buildings."If you add up all the plans coming out of provincial governments it could be nearly double what the central government is willing to spend," said William Hess, Beijing analyst for Global Insight. "They're aiming for growth somewhere about 8 per cent. They might be able to hit that," he said.Yesterday the World Bank trimmed its China GDP forecast for next year from 9.3 per cent to 7.5 per cent.But the World Bank said more than half of the expansion will come from "government-influenced spending".The new surge of government-sponsored Chinese building will soon begin to prop up resources demand. It may also leave a legacy of an economy that is dangerously reliant on investment. In the meantime, resources companies are incredibly cheap, the Australian dollar has lost two-fifths of its value against the yuan and BHP's decision last night has created space for bargain-hunting Chinese companies to play.
© 2008 Sydney Morning Herald