Economy of China to Decelerate?

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What about China, though? RBA governor Rick Battelino told a group of people in Sydney last night that despite the interruption of the GFC, “the underlying dynamics of the resource boom are starting to reappear. Those dynamics, presumably, are China’s growth and the investment required in the domestic resource economy to increase production of coal, iron ore and everything else China buys from Australia.

Battelino says, “It’s hard to put a finger on exactly how much investment is going to take place, but I don’t think it’s unreasonable to expect mining investments to rise to 6 per cent of GDP over the next few years. That would be about twice as high as it got to in the previous boom. It’s a very big boom.”

He reckons the boom could last into the 2020s. “Past booms do not seem to have lasted more than about 15 years before resource depletion or international or domestic developments acted to slow economic activity and bring the boom to an end.” But fear not!

“On this occasion, the growth potential of countries such as China and India suggests that the expansion and resource demand could continue for an extended period. Whether this eventuates, however, will depend on, at least to some extent, the economic management skills of the authorities in these countries, not to mention our own.”

But there are plenty of sceptics on the China story already. Our old friend Marc Faber told Bloomberg that, “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity. I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

And what would that mean for Australia and Aussie stocks? Quite a lot, of course. Faber says that, “If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities.”

That couldn’t be any clearer.

But maybe we are overly pessimistic. We’re hopping on a plane tomorrow and headed to the other side of the world to discuss these and other matters with some old friends who’ve been in the investment game for a long time. If they are more sanguine about things, then we’ll be really worried.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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7 Comments on "Economy of China to Decelerate?"

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Edward
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China turns its gaze inward for future growth By James Kynge Published: January 18 2010 17:18 | Last updated: January 18 2010 17:18 One of the first global projections of demand from a rising China came in early 2004 when manhole covers began to disappear from streets around the world. Thieves had noticed how much Chinese steel demand had bid up the price of scrap metal. They melted the covers down and sold them to local merchants who shipped them over to China. The source of the hunger then was mostly the rapid growth of large cities on China’s eastern… Read more »
bruce
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food for thought

Ben Gee, Edmonton, Canada
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Ben Gee, Edmonton, Canada
China’s economy will one day mature. When will that be is up to speculation. Some day there will be roads and rail connecting every major cities in China. The same with airports and seaports. China is already producing more goods than it can sell. So, some day, Chinese growth will slow down. However, that day is not next year or the following year. China may grow at 8-9% for the next 10 years. From 2020-2030, China’s growth may slow down to 5-7%. After, 2030, China’s growth may slow down to 3-5%. So, do not expect China’s GNP to grow to… Read more »
Biker Pete
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An informative, interesting, detailed piece, Edward. Our second son who has a reasonable command of Mandarin, was awed and a little disappointed by the extent of industrialisation in China. He’d harboured a more romantic (and very naive) image of China…. and finally decided that instead of staying to improve his language skills, to keep moving after three months there. Given two competing empires, one dominated by lobbyists with extreme commercial / political power, vs. an empire with very, very long-term plans and massive finance, I’d back the latter, however distasteful and how politically opposed to my own leanings. Tragically, America… Read more »
Christina
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Whoever thinks that Australia is about to boom, it will be more like kaboom! Then the media will be like “oh what a surprise! Who would have ever known’

Lachlan
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Is there any doubt that a very large percent of Chinas manufactured goods go offshore. Does anybody know how China can shift the demand for their manufactured products into their domestic economy and fast? Maybe a welfare explosion for short term effect I thought but we know where that will end. A reduction in public spending, but is this likely?

PJPW
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Well, the critical test will be whether China can shift from export to domestic demand. The results in its auto market show it probably will be able to do so. In 2000 China sold 1 million cars per year ( Aust size auto market) while in 2009 China sold 13 million cars per year (larger than US auto market).

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