The ‘Fix’ for the Chinese Economy

Steen Jakobsen, chief economist of Saxo Bank, has news for you. He analysed the economic policies that came out of China’s 3rd plenum, a meeting of the Chinese brains trust. Here’s Steen’s summary: ‘The biggest loser: Australia. The most direct link is commodity expansion and now slowing global demand.’ 

Uh oh. Not only is mining investment in Australia going to ‘fall off a cliff’, as all the local analysts put it, but commodity demand will take a hit too. All those enormous projects Australia’s booming mining sector set up could be unprofitable just as the pace of creating new ones slows too. We’ll go from a two speed economy to…a two speed economy. But with mining a drag instead of the engine.

But why the change? Well, the Chinese have figured out that their economy has misallocated capital. And on an enormous scale. There are too many apartment buildings and steel factories. So they’re going to ‘fix it’.

That’s like Tim Allen telling his co-star of Home Improvement he’s going to ‘fix it’. If they got it wrong the first time, why would they get it right the second time? Worse still, when you stop funding whatever economic bubbles you created, they tend to pop instead of just going away. Fix or no fix, that’s going to mean economic pain.

China’s leaders at the Plenum said ‘markets’ would play an integral role in China’s economy going forward. What China’s leaders seem to forget is that markets are very good at destruction, not just creation. They weed out businesses and projects that are wasting capital which could be used elsewhere for more productive purposes. Projects like empty apartment buildings.

Usually that’s a good thing. But if you’re the person who borrowed or lent the money to build and buy the apartments, it isn’t a good thing for you. And if you are the person who sells the resources used to build more apartments, you’re in real trouble.

We wish the Chinese the best of luck with their ‘markets’. Whether it’s market driven or government controlled, an economic rebalancing in China will mean less construction. And that means less demand for Aussie ore. Dan Denning picks up the story on what happens next here in Australia.

The good news is that the Chinese have plans to allow ordinary citizens to invest overseas more. Not many first home buyers read Markets and Money, so we’ll call it good news for today.

Regards,

Nick Hubble+
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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.


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