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
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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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 Edward on 24 February 2010:
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 and southern seaboards. Now the covers have begun to disappear again and China is presumed to be their ultimate destination.
EDITOR’S CHOICE
China’s hinterland picks up baton - Jan-18FT series: Building Brics - Jan-21Video: Stephen Green on Asia’s rise - Jan-18Join the debate: Brics consumers - Jan-19Mobile phones transform life of India’s poor - Jan-18Russian appetite for bling put to the test - Jan-18However, nearly six years after the phenomenon was first noticed, something important has changed. The source of Chinese demand has gone “undercover”. The font of China’s urbanising appetite is no longer its coastal conurbations but so-called third and fourth tier cities mostly in inland areas.
The anonymity of this trend stands in sharp contrast to its influence. Few non-Chinese could name any of some 150 cities with a population of about 1m each that are engaged in strenuous bouts of building. Nevertheless, the construction of airports, roads, railways, factories, homes, hotels and factories in these places is driving global demand for base metals and setting prices on the world’s exchanges.
China’s fixed asset investment statistics illustrate this trend. In 2005, FAI was most robust in Beijing, Shanghai, Guangzhou, Shenzhen and the provincial capitals, but in the first 10 months of 2009 lower-tier cities accounted for a sharply growing portion of total investment. The transformation of China into a continental economy, driven increasingly by internal energies rather than by any dependence on trade, mirrors a similar process that took place in the US during the 19th century.
Sceptics, however, abound. Some argue that China is still ultimately dependent on exports for quality growth and that the urbanisation of the hinterland is unsustainable, driven mainly by overzealous local governments rather than as a response to the genuine creation of value at the local level.
China Confidential researchers visited several fourth-tier cities in different parts of the country in November to test this hypothesis. Some of the cities we encountered gave pause for thought – an almost entirely empty new city some 32 sq km in size in Ordos, Inner Mongolia, seemed to destined to become a monument to local hubris.
But on closer inspection, each of the eight cities we profiled showed ample local value being created. Shuangliu, a city near Chengdu in south-west China, is a leader in the commercialisation of agriculture. Jingzhou on the Yangtze river is an emerging transport hub. Heyuan, far upstream on the Pearl river in Guangdong province, is catching some of the wealth from richer coastal areas, Shouguang in Shandong province is a centre for high-grade vegetable production, Jinjiang in Fujian is a cradle of shoe and clothing brands and Fangchenggang is a booming port.
Even Ordos might not turn out to be such an egregious example of overcapacity in the longer term. The new city stands next to an older settlement nearby China’s largest coal mine. Since it began production in 2001, the coal mine has transformed a sleepy settlement on the steppe into a bustling urban centre. From 2001-2008, annual gross domestic product growth averaged 29.7 per cent and 2008 GDP per capita was Rmb95,200 ($13,941, €9,440, £8,535) – the third highest of any city in China.
It may be that the local government will find success in persuading the wealthy inhabitants of the old city to move to the new city. At any rate, the source of the city’s wealth – the coal mine – is not expected to be exhausted for decades.
James Kynge is editor of China Confidential, a research service on China at the Financial Times
Comment by bruce on 24 February 2010:
food for thought
Comment by Ben Gee, Edmonton, Canada on 24 February 2010:
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 $ 123 trillion. The world does not have enough resourses for that to happen. But do not be shock if China's economy reach $ 37-45 trillion by 2040.
Comment by Biker Pete on 24 February 2010:
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 has lost the plot. In this one matter, Bonner is correct. Financially, it's probably Game Over... . Glad we're not among the NH casualties.
Comment by Christina on 27 February 2010:
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'
Comment by Lachlan on 27 February 2010:
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?
Comment by PJPW on 28 February 2010:
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).