For Australia, there’s a lot riding on the assumption that substantial Chinese economic growth is assured. The continuing mining boom and its associated massive investment surge is heavily built around a belief that China will continue it’s three-decade spectacular growth well into the future.
If that belief proves false, Australia’s comparative healthy economic circumstances could change dramatically. That’s why last week’s warning from the Financial Times‘ bureau chief in China, Geoff Dyer, is worth more than a second glance. Dyer assessed the Chinese property market as being in high bubble territory.
He likened the Chinese residential market to that of Dubai suggesting the recent Dubai crash is set to repeat in China. The Chinese optimists counter this by pointing to the huge urbanisation still to happen in China. Under this view 400 million Chinese could move to the cities in the next two decades guaranteeing demand for large-scale residential development.
However, if a less glowing analysis of China by Pivot Capital is accurate, the Chinese urbanisation process is actually close to complete. Pivot’s analysis puts a range of assumptions about China into the “myth” category.
Chinese statisticians assess urbanisation differently to most other countries. Cities and towns that the US and Australia would consider urban would be discounted in China as being “non-urban” because of comparative low population densities. Brisbane (1.9 million people) and Houston Texas (2.2 million) are not urbanised according to the Chinese definition.
Pivot cites the example of Songxia a “village” of 110,000 people and producing most of the world’s umbrellas, being categorised as non-urban. If this same approach were applied to Europe, large numbers of significant industrial centres would be excluded. Adjusting for these definitional differences, Pivot’s analysis is that the potential urbanisation still to occur in China is modest.
In addition, Chinese residential stock is not, as is generally assumed, of a low standard. Consequently the demand for residential upgrading is exaggerated.
And on industrialisation, Pivot says the Chinese process is almost complete.
Infrastructure development is advanced to the stage where excesses are becoming a norm. Road infrastructure is near parity (in terms of size) to the US, but China only has one-sixth the number of cars. Local governments are having trouble spending on infrastructure to the extent demanded of them by Beijing. One instrumentality tore down and rebuilt a raised highway to ensure their spending target was met.
Rail transport has room to grow. China has large population concentrations in and between big cities making high-speed passenger rail viable. Even so, new lines are being built to “nowhere” and the additional infrastructure needed or planned is not large enough to counter the pull-back in other areas.
Pivot’s point is that large sums are already being spent on projects with marginal or dubious return. Such uneconomic return on investment cannot and will not continue. Pivot’s analysis predicts that China’s capital spending cannot be sustained and (alarmingly) will collapse in 2010.
The firm provides evidence that Chinese credit expansion has reached a similar level to that which existed in pre-crisis Japan in 1991 and in the USA in 2008. The predicted slowdown will have similar ramifications to those of the US sub-prime collapse.
Further, the Chinese consumer is not and cannot power a new growth surge. Chinese private consumption accounts for about 33% of GDP. Compare that with most developed economies, where the figure is about 70%. Chinese private consumption will grow, but must achieve an incredible 20-30% real growth over the next two years for overall real growth in GDP to reach 10%.
Pivot says this is not possible. Postwar US growth rarely exceeded 10%. Japans’ post-war reconstruction, private consumption growth peaked at 12% in 1961. In the decade to 2007, China’s private consumption growth averaged 8.2%. This is likely to drop. Unemployment is believed to be at least double that of the officially reported 4.3% and household income (as a ratio of GDP) has declined 20% over the last decade.
The analysis concludes that Chinese overall growth will be about 5-6% for the foreseeable future. In ordinary times, this is impressive. But it’s not nearly enough to power the world out of its economic slump.
If Pivot’s Chinese economic myth-busting is accurate, many of Australia’s optimistic economic assumptions going forward are likewise challenged. It seems 2010 will tell the truth.