Here’s a date for resource investors’ calendars: 1pm on the 15th of April.
That’s when we hear the rate at which China’s economy grew during the first three months of this year.
This will be one of the most important data points out this month. You see, Chinese growth fell steadily through 2011 and 2012. And this saw resource stock prices follow the Chinese numbers down.
But then…the last reading of 2012 showed a sudden increase in growth.
The trillion-dollar question is this: was this a one off, or could it be the start of a Chinese recovery?
We find out soon. Until then the depressed resource sector hangs in the balance…
We saw a pretty decent jump when Chinese growth increased in the last quarter of 2012. It bounced from 7.4%, to 7.9%, almost making up for the falls of the previous two quarters.
Chinese Growth — Accelerating Again?
So, What’s in Store Next?
Well, I’m starting to think we’ll get a solid result, as in higher than 7.9%. This would be a bad look for the China bears. One big reason to expect a solid result is some of the data we’ve seen.
The PMI (purchasing manager’s index) is a good up-to-the-minute ‘leading indicator’ on how much activity is going on at business level. It’s been a pretty reliable heads up on what to expect from the quarterly growth rate.
Of course, it means trusting government statistics, which can be a leap of faith. Fortunately we have an alternative. Markit Economics compiles a non-government measure of China’s PMI, on behalf of HSBC. This gets announced as the ‘HSBC’ PMI.
The good news is that the numbers are looking much better here. To put it in context, above 50 is positive, 52-53 was typical prior to the GFC, and 57 is about as high as it ever gets.
This January we saw it at 52.3, in February it came in at 50.4 (lower due to the Chinese New Year), and March’s just came in at 51.6. The numbers have been above 50 now for five months.
China PMI Numbers — Looking the Best in Two Years
In the last quarter of 2012, the numbers were 49.5, 50.5, and 51.5. On average they were just 50.5. Yet this saw the GDP growth turn back up for the first time in two years from 7.4% to 7.9%.
The average read for the PMI this quarter is 51.4. This is great news. I’d say that’s good enough to expect the GDP figure to come in above the last rate of 7.9%.
And in turn, that should help mining stocks break out of their current funk, and head on a bearing of North-North-East once more.
Two weeks ago I attended the Mines and Money conference in Hong Kong. There was quite a bit of talk on Chinese growth. Here’s a snippet from the notes I sent to Diggers and Drillers subscribers on it last week:
‘One of the speakers was Amy Cheng, the MD of investment banking for Bank of China International. And speak she did … in machine-gun Cantonese! I listened via headset, and the translator was even having a hard time keeping up.‘Cheng’s talk went on to some macro stuff, and it was good to hear her forecast of 8.3% Chinese growth for this year.
‘We get the first quarterly GDP figure for the year on the 15th April at 1pm, along with FAI and IP. So we will get our first taste of growth for the year then. Given the steep jump in Chinese lending (as per the Social Financing Aggregate) at the start of the year, and positive PMI figures (above 50 at any rate) I think we may be in for an increase on the 7.9% of the December 2012 quarter.
‘Not that resource investors really need a big jump. Anything above the 7.5% mark is more than enough to be bullish on commodities and resources — given the Chinese economy is as much as half the size of the US now. Really investors just want to be reassured that the intentional deceleration in Chinese growth of 2011–2012 was in fact intentional, and has finished.
‘Cheng didn’t sugar-coat things in her talk though.
‘She made a surprisingly big point, for a Chinese bank, on the fact that government spending is bloated at 50% of GDP. And that China’s big challenge is to convert this into consumer demand, so that money and activity is circulated at the private level more.
‘Though she said the big issue here is that most of the wealth generated in the last few decades has been amassed by just 10% of the population (around 130 million people). So it is a very dysfunctional financial ecosystem.
‘You can measure how fairly wealth is distributed in an economy with the ‘Gini coefficient’. I read in the Chinese newspaper, Caixin, recently that the China’s Gini is now 0.61, which I’m pretty sure is the highest in the world. This means that the spread between poor and rich in China is the most extreme on the planet.
‘Cheng’s concern was this: how is China supposed to migrate to a stable consumer society over the next decade or two, when this degree of wealth disparity exists?
‘It’s a good question, and one that much longer-term future commodity demand probably depends on, as China’s government can’t drive the economy indefinitely, and is a story I’ll need to follow.’
The Long History of Capitalism in China
With a bit of luck I may be heading over to Beijing in June to attend, and possibly speak at, another resources conference. I like to do site visits for mining companies I’m looking at, and likewise I want to get my feet on the ground in China if I’m writing about China! I’ll keep you posted.
To finish off, here’s an interesting chart to put the recent Chinese growth in a much wider historical context.
The light blue line shows China’s share of the global economy over the last 2,000 years, with a forecast for the next ten years for good measure. Europe is dark blue, and the US is light grey:
China — Historically the Biggest Global Economy
It’s a cool chart. It shows that from the 1st century to the 19th century, China was bigger than Europe, and bigger than the US right up to the start of the 20th century.
In this context, the last few decades of freakish growth in China are more of a ‘return to previous form’ than an incredible rags-to-riches story.
And considering China was the biggest economy in the world for most of the last two millennia — is it so hard to imagine China getting back on top again?
Dr Alex Cowie
Editor, Diggers & Drillers
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