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Published: November 8, 2010
A very large grain
of salt. That's what economists suggest you take when digesting
Chinese economic numbers.
The country's financial planners tend to massage key numbers to
give the impression of an economy that is neither too hot nor
too cold. To its credit, China's decade-long growth spurt has
been truly miraculous and policy planners seem to continually
pull the right levers, even though those choices are often
antithetical to Western economic dogma.
Much of China's success has come from its status as a low-cost
provider of goods and comparatively low levels of per capita
GDP, which enabled it to grow without bumping into hurdles that
often come when economies achieve world-class status.
But those days are over. China's economy is now far larger --
having recently surpassed Japan to occupy the No. 2 spot -- and
the government 's task of managing growth has become ever-more
complex. Even as Chinese economic planners will continue to
massage the numbers to give the appearance of a smooth-sailing
ship, 2011 offers more potential pitfalls than ever. If you're
invested in China, here are five items you'll need to watch:
1. An unhealthy bank sector. The biggest flaw of a
centrally-planned economy is a misallocation of resources. So
when China decided to use its state-owned banks to promote a
massive build out of residential and
commercial real estate, it ran the risk that those projects
would not see enough demand. That's now become a reality as
China is said to be sitting on millions of square feet of empty
commercial and residential real estate.
More than likely, China will
need to inject massive amounts of liquidity into those banks in
2011 to keep them afloat. At the same time, China is likely to
conclude that enough is enough, and future real estate lending
terms will be much stricter. And that could set the stage for a
massive construction hangover, just like we're seeing in the
United States.
2. Cooling job growth. Here in the U.S., worries and
anger over persistent joblessness has led to a change in
political leadership. In China, no such outlet exists. Instead,
Chinese workers tend to take to the streets to protest a range
of labor-related concerns. Relatively high employment levels
have kept any restlessness at a low boil, but Chinese leaders
know that any increase in unemployment could have dire social
consequences and undermine leadership's legitimacy.
That's why Chinese leaders have aggressively stimulated the
economy, building roads, trains and skyscrapers at a break-neck
pace. Yet the government has already played that hand, and
policy planners know that Japan erred by building too much
infrastructure that went on to be under-utilized. So these
planners are hoping that the private sector can pick up the
slack and hire many of the workers that may soon be laid off
from public works' programs. Navigating that path may prove
bumpy.
3. The yuan dam may burst. China has done an impressive
job of recycling foreign earnings back into foreign investments,
which is one the reasons its currency hasn't appreciated sharply
as expected, as trade surpluses build.
In recent years, China has sought to recycle some of those
foreign-earned profits elsewhere to reduce a heavy exposure to
the U.S. dollar and the U.S. economy. But China's total foreign
holdings are now so massive, and its foreign earnings continue
to pile up so quickly (with fewer places to go), that the
country will soon have no choice but to bring some of that money
back home. Yet by repatriating foreign earnings, China's
currency is bound to feel the pressure to move higher.
China is keeping a lid on this by maintaining a tight band on
the value of its currency, but the longer it allows the pressure
to build, the greater the unforeseen effects will be when the
currency finally floats freely on global markets. Chinese
planners can either maintain the status quo, and set the stage
for a real headache down the road, or start to shift policy soon
to start to alleviate budding currency pressures. How Chinese
economic planners navigate this policy will be a true test. A
sharp spike in China's currency would devastate its export-led
economy, but inaction would prove to be equally harmful.
4. Increasing trade tensions. While China is keeping its
currency weak by pegging it to the sinking dollar, trading
partners throughout Asia are starting to grow annoyed. The
Japanese yen, the Thai baht, and the Malaysian ringgit have all
appreciated at least +10% against the yuan this year. And while
that's great for China's exporters, other countries are quickly
losing their competitive edge. The issue should dominate
discussions to be held by the Group of 20 (G-20) nations on
November 11 and 12 in Seoul, South Korea. It's not clear how
China will be able to continue avoiding this issue if it is to
avoid even more anger among trading partners and neighbors in
2011.
5. A growing political rift. Lastly, the Chinese
leadership is no longer moving in lock-step on key issues such
as freedom of the press and corruption, and this threatens to
evolve into a major internecine battle. China's Premier Wen
Jiabao noted on Newsweek columnist Fareed Zakaria's GPS program
on CNN last month that China will need to open up and develop
greater transparency if economic growth is to continue. His
comments were quickly denounced by other members of China's
leadership and were ultimately expunged from the public record.
But other members of China's leadership quickly came to Premier
Wen's defense. Although unlikely, this increasingly
factionalized environment could ultimately lead to a major rift
among key policy makers.
Action to Take --> It's been smooth sailing for
China. Yet the waters are starting to get choppy, and investors
need to brace for potential problems in 2011. If you hold any
Chinese stocks, keep these points in mind heading into the New
Year. Depending on how these situations play out, you may want
to reassess your positions.
-- David Sterman
Staff Writer
StreetAuthority |
