Fuelled by a growing economy China’s voracious appetite for New Zealand forest products had made it the industry’s number one export destination. Are the fundamentals driving this demand about to change?
The Telegraph reports the Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trades for 2011.
It is believed that China’s credit bubble needs to be burst before inflation levels threaten social stability.
Officially inflation in China was 5% in November; however it is hard to find anyone who believes itr is that low. Vegetables, as an example, have risen 20% in a month.
The Chinese government learnt from Tiananmen in 1989 how surging prices can cause civil unrest.
The RBS recommendation is not a forecast that China will default but is an insurance against China suffering a hard landing that would have dire consequences throughout Asia.
The Chinese government has already stated that they would be moving from relatively loose money to a much more prudent policy in 2011.
There is a real chance of China’s economy entering a cycle of stagflation where credit pumping leads to speculation and price spirals even as growth slows.
At the moment the credit growth in China is going into property which is one of the drivers in the demand for wood fibre.
Some experts say that China’s property bubble has already outdone America’s subprime situation and even that of the Tokyo frenzy of the late 1980’s.
House prices are 22 times disposable income in Beijing, compared to eight in Tokyo.
The US bubble peaked at 6.4 and has since dropped to 4.7. The price to rent ratio in China’s eastern cities has risen by over 200% since 2004.
Following the global financial crisis, China is trying to keep going as if nothing has changed, but this won’t work. They really do not want to raise interest rates fast enough to let air out of the bubble because this would expose bad debts in the banking system.
Fitch Ratings have done a study with Oxford Economics on what would happen if Chinese growth slowed to 5% in 2011, tantamount to a recession for China. They say the risk is definitely there and the result would be a 20% fall in global commodity prices and a 25% fall in Asian bourses.
These predications are borne out by the fact that a slight recent cooling in China’s credit growth led to economic contraction in Malaysia and Thailand for the third quarter 2010.
There is also anecdotal evidence also of galloping wage inflation.
China may have hit the “Lewis turning point”, named after the Nobel economist, Arthur Lewis. It is the moment for each catch up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages.
With New Zealand’s forest product exports so reliant on a booming China, these indicators are cause for concern