The other 'face of demand' (as opposed to investment demand) you'll find in the real economy. And by all appearances, that demand is as robust and sturdy as red wheel barrow. For example, we read the other day that U.S. auto-parts maker Delphi (DPHIQ) became the latest in an eager bunch of Western firms to begin supplying high-end parts to a Chinese car maker, Chery. Global firms crave access to China’s market.
--The story is interesting in that Delphi is one of the few American industrial manufacturers that may successfully survive competition with lower-priced Asian manufacturers by doing what it has to, namely moving up the latter of value-added products and selling the Chinese what they can’t make themselves, at least not yet. It’s also interesting because Delphi finds itself in a bidding war between private equity groups who crave, above all, real tangible assets on sale, which Delphi happens to have.
--But the story is most astonishing because it shows just how rapid Chinese domestic demand is growing, and thus, how the shape of real demand in the global economy is shifting away from America and towards Asia. Keep these figures in mind when you read about rising oil inventories in the U.S. taking the steam out of oil’s bull market. Chery, the Detroit Free Press reports, produced 50,000 cars in 2002. Four years later it produced nearly 300,000 cars.
--That’s growth of 500 per cent in just four years. And the company would like too increase production to and sales to 1 million units by 2010. Granted, GM alone sold 350,000 cars in December of 2006 in North America, and 4.1 million for the year. Chery is no GM, at least not yet. Who knows, maybe some day Chery will buy GM, if private equity firms don’t get their first.
--And keep in mind that GM and Ford both sold 14% fewer cars in December on a year-over-year basis than Toyota, which increased its sales by 13% during the same period. Toyota now sells more cars in America than Daimler Chrysler. Chery has a deal to begin selling at least one car in North America through Daimler Chrysler in a few years. Perhaps in a few years, cheap Chinese imports will pepper American traffic jams the way Japanese imports did in the late 1970s. China has quite consciously imitated Japans export-driven, manufacturing-based growth model.
--We know, we know, you probably have heard it before. The market for everything in China is huge because, well, because there are so many Chinese. But we’ll repeat it just to make the point that demand in the real economy—the part driven by China—is chugging along just fine, regardless of what the financial markets do today and tomorrow. J.D. Power and Associates reckons that Chinese auto sales grew by 25 per cent last year to a total of 6.8 million units. The forecast for 2007 is for 7.6 million cars and trucks. Think of what that will do for oil demand—which by the way has not fallen with the oil price (as any student of economics knows, falling prices lead to greater demand, not less.)
--Between its industrial development, its development as a producer of raw materials, and its development as a consumer economy with strong domestic demand, we see a lot of zinc, copper, and oil in China’s future. And that makes us rather bullish on commodities, even if the money shufflers are selling. We are forty-two per cent more confident today than we were yesterday, give or take 10 per cent.
--It really comes down to distinguishing the real economy from the financial economy. In today’s Wall Street Journal you’ll find a story reporting that the total value of global stocks, bonds and other financial assets was $140 trillion in 2005. It was an all time record, and more than three times global GDP of around $40 trillion (see below).
--Yes, it’s true that stock and bond prices are based on future value and not present value. But the growing divergence between the real economy and the financial economy reflects exaggerated expectations about the future in financial markets. Plain and simple. People are paying too much today for future earnings, or for assets whose value can quickly change over night. The size of the figure simply reminds us that buying assets of real, tangible value, though not in fashion, is a much safer and proven long-term bet.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by watcher7 on 11 January 2007:
I have been arguing, for some time, that China will collapse into civil war/anarchy as a result of the collapse of the Communist Party, under American world hegemony, so as to rhyme with the collapse of the monarch in 1911/12 under British world hegemony.
* A new book makes a similar suggestion:
Will Hutton, Power corruption and lies, guardian.co.uk, Jamuary 8, 2007:
Absolute power corrupts, and the Chinese Communist party has become one of the most corrupt organisations the world has ever witnessed. The combination of absolute power and an ideology that palpably no longer describes reality is a virus that is morally and psychologically undermining the regime. And if the regime wobbles, then its capacity to sustain the unsustainable economic structures will wobble and Leninist corporatism will unravel. Beijing's authority could fragment and China's provinces reassert their destructive independence as they did in the 1910s and 20s, or a new and fiercely repressive regime could try to hold the country together abandoning economic openness and market reforms - and even pick some international fights (such as invading Taiwan?) to rally the country to its side. It is because this prospect is so real that the task of peacefully moving to a sustainable capitalism, and building the necessary institutions to do it, is so vital for both China and the world...
Compare also Ta Ch'ing Dynasty corruption.
China after 2001 is just Japan after 1987 - an accident waiting to happen.
Some fireworks with Japan to aggravate the situation.
Especially with development:
* Chris Hogg, Japan upgrades its defence agency, bbc.co.uk, January 9, 2007:
In the past the deployment of troops abroad, such as the efforts to support the coalition in Iraq, required parliamentary approval for what were known "extraordinary missions".
Now the law has been updated to list activities such as peacekeeping or international relief as the primary missions of the self-defence forces.
That means that in future Japan's parliament would not have to agree before troops are sent overseas.
Japan's $41bn defence budget already gives it one of the most powerful military forces in the world.