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On China And The End Of The Commodity Super-Cycle; From ZeroHedge
Topic Started: 7 Mar 2012, 11:46 AM (5,086 Views)
TMR
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miw
4 May 2012, 10:49 PM


I have a strong feeling that agricultural land will outpace residential property over the next decade....
Not a bad shout, there have been plenty of farmers selling up due to the drought/floods so I'd imagine there are several places where you'd be able to pick up cheap agricultural land. Obviously the proviso is that it's a big punt on there not being many more years of extreme weather that reduces crop yields (which I think will be increasingly likely with current climate issues) - so it could be a bumpy ride!
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BubbleBoy
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davel
4 May 2012, 12:55 PM
What people are forgetting a bit is that China is trying to engineer a huge shift in the makeup of its economy from mostly fixed-investment driven to more consumption-driven. The chances are that even if this works, it will reduce overall growth somewhat.

If it is successful with this transition, demand for commodities will grow less (not fall :-) because consumer-based growth is less resource-intensive.

If they are NOT successful with this, then they are facing even more problems than they do already (which is why they're attempting this). The more unproductive fixed investments you make, the more you kill future growth.


So to sum up, there is virtually no scenario where Chinese demand for commodities continues to grow at the same or faster pace than it has over the last few years. And at the same time, supply is increasing.

Strindbergs point is valid EXCEPT that demand for commodities has always grown over the long-term, always. We need more iron now than we did in 1990, and more then than in 1960, and more then than in 1900. So if this were the driver of price, then price would always rise always. The fact that instead commodities follow boom-bust cycles shows you that overall rising demand is not the whole story.
Strindberg's point is not valid - if Chinese grows at a much slower rate, commodity demand will not necessarily be resilient.

The fact that commodity demand increases long-run is a separate matter.

From famous Sinologist/Economist Michael Pettis comes this prediction:

http://www.businessspectator.com.au/bs.nsf/Article/china-growth-predictions-chinese-economic-model-gd-pd20120504-TXV3X?opendocument&src=idp&emcontent_asx_financial-markets&utm_source=exact&utm_medium=email&utm_content=38214&utm_campaign=kgb&modapt=commentary

12. Non-food commodity prices are set to collapse over the next three to four years

“Collapse” is not too strong a word. China’s share of global demand for such commodities as iron, cement, copper, etc, is completely disproportionate to its size and almost wholly a function of its very high growth in investment. As investment growth drops sharply, as it must, global demand for non-food commodities will plummet.
My name is based on a Seinfeld character, not on a belief of a housing bubble.
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Mike
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BubbleBoy
5 May 2012, 01:23 PM
12. Non-food commodity prices are set to collapse over the next three to four years

“Collapse” is not too strong a word. China’s share of global demand for such commodities as iron, cement, copper, etc, is completely disproportionate to its size and almost wholly a function of its very high growth in investment. As investment growth drops sharply, as it must, global demand for non-food commodities will plummet.
Really. How is China set to grow alot slower as you claim. Most experts including the IMF, World Bank are showing China will grow at 8-9% over the next few years. Down from there 9-10% growth over recent years but far from slowing alot as you claim. If China slower to 4-5%, that would be alot and I would agree prices would come down a fair bit in that scenario. This is unlikely to happen for perhaps 10-15 years. China will move between a 7-9% growth range over the comming decade.

So in this scenrio which also reflects the present day real world growth, how will resource prices come down if demand remains strong. The Chinese Govt is trying to move more towards a consumption based economy so its not so reliant on exports and is succeeding at present. Chinese govt policies are also executing an increase in its urban population living in cities from the present 280 million to 500 million by 2020. This is stated Govt policy. What will an increase of 220 million in population living in new chinese cities do for demand for resources? In the next year alone Chinas has approved plans for 38 million new appartments. It seems the Chinese Govts policies defer with your opinions, they seem to be focused on providing infrastructure, housing and services for the next 220 million people to move into its cities. Even at 500 million by 2020, this is only 35% of Chinas population that will be urbanised. I would expect the Chinese Govt to aim to increase this to 800 million by 2030. To reach present western standards of urbanisation and infrastucture China needs to urbanise about 75% of its population. That figures on todays population is 975 million. So even by 2030 China is still short by 175 million people to urbanised, unless of course they move at a faster rate which is possible, im being conservative.

So looking at the figures presently, just to match current western levels of urbanisation which is a goal for the Chinese Govt, its needs infrastructure, housing and services for another 675 million people. That is 200% the population of the present day United States.

I think this gives you some idea that China is only in the 1st stages of its economic expansion and has along way to go.
http://mike-globaleconomy.blogspot.com.au/
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BubbleBoy
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Mike
5 May 2012, 02:36 PM
Really. How is China set to grow alot slower as you claim. Most experts including the IMF, World Bank are showing China will grow at 8-9% over the next few years. Down from there 9-10% growth over recent years but far from slowing alot as you claim. If China slower to 4-5%, that would be alot and I would agree prices would come down a fair bit in that scenario. This is unlikely to happen for perhaps 10-15 years. China will move between a 7-9% growth range over the comming decade.

So in this scenrio which also reflects the present day real world growth, how will resource prices come down if demand remains strong. The Chinese Govt is trying to move more towards a consumption based economy so its not so reliant on exports and is succeeding at present. Chinese govt policies are also executing an increase in its urban population living in cities from the present 280 million to 500 million by 2020. This is stated Govt policy. What will an increase of 220 million in population living in new chinese cities do for demand for resources? In the next year alone Chinas has approved plans for 38 million new appartments. It seems the Chinese Govts policies defer with your opinions, they seem to be focused on providing infrastructure, housing and services for the next 220 million people to move into its cities. Even at 500 million by 2020, this is only 35% of Chinas population that will be urbanised. I would expect the Chinese Govt to aim to increase this to 800 million by 2030. To reach present western standards of urbanisation and infrastucture China needs to urbanise about 75% of its population. That figures on todays population is 975 million. So even by 2030 China is still short by 175 million people to urbanised, unless of course they move at a faster rate which is possible, im being conservative.

So looking at the figures presently, just to match current western levels of urbanisation which is a goal for the Chinese Govt, its needs infrastructure, housing and services for another 675 million people. That is 200% the population of the present day United States.

I think this gives you some idea that China is only in the 1st stages of its economic expansion and has along way to go.
I never said China will grow a lot slower. I raised it as a possibility. Hence you claim that I am claiming that "China set to grow a lot slower" is incorrect. But if you want to stick to the strawman, suit yourself.

How is it possible growth will slow while IMF/World Bank are predicting 8% growth? Believe it or not, it is hardly the first time for them to be wrong. I would not be surprised if Chinese growth does/doesn't slow down - it's not something I have a firm prediction of. Having said that, your simplistic analysis of "China is urbanizing and hence commodity demand must remain strong" hardly effectively models a complex economy that has over-invested in much infrastructure that has a net economic cost, is run in an opaque manner and has much hidden, growing debt.

My name is based on a Seinfeld character, not on a belief of a housing bubble.
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Mike
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BubbleBoy
5 May 2012, 03:27 PM
Mike
5 May 2012, 02:36 PM
Really. How is China set to grow alot slower as you claim. Most experts including the IMF, World Bank are showing China will grow at 8-9% over the next few years. Down from there 9-10% growth over recent years but far from slowing alot as you claim. If China slower to 4-5%, that would be alot and I would agree prices would come down a fair bit in that scenario. This is unlikely to happen for perhaps 10-15 years. China will move between a 7-9% growth range over the comming decade.

So in this scenrio which also reflects the present day real world growth, how will resource prices come down if demand remains strong. The Chinese Govt is trying to move more towards a consumption based economy so its not so reliant on exports and is succeeding at present. Chinese govt policies are also executing an increase in its urban population living in cities from the present 280 million to 500 million by 2020. This is stated Govt policy. What will an increase of 220 million in population living in new chinese cities do for demand for resources? In the next year alone Chinas has approved plans for 38 million new appartments. It seems the Chinese Govts policies defer with your opinions, they seem to be focused on providing infrastructure, housing and services for the next 220 million people to move into its cities. Even at 500 million by 2020, this is only 35% of Chinas population that will be urbanised. I would expect the Chinese Govt to aim to increase this to 800 million by 2030. To reach present western standards of urbanisation and infrastucture China needs to urbanise about 75% of its population. That figures on todays population is 975 million. So even by 2030 China is still short by 175 million people to urbanised, unless of course they move at a faster rate which is possible, im being conservative.

So looking at the figures presently, just to match current western levels of urbanisation which is a goal for the Chinese Govt, its needs infrastructure, housing and services for another 675 million people. That is 200% the population of the present day United States.

I think this gives you some idea that China is only in the 1st stages of its economic expansion and has along way to go.
I never said China will grow a lot slower. I raised it as a possibility. Hence you claim that I am claiming that "China set to grow a lot slower" is incorrect. But if you want to stick to the strawman, suit yourself.

How is it possible growth will slow while IMF/World Bank are predicting 8% growth? Believe it or not, it is hardly the first time for them to be wrong. I would not be surprised if Chinese growth does/doesn't slow down - it's not something I have a firm prediction of. Having said that, your simplistic analysis of "China is urbanizing and hence commodity demand must remain strong" hardly effectively models a complex economy that has over-invested in much infrastructure that has a net economic cost, is run in an opaque manner and has much hidden, growing debt.

Your simplistic answers as to this sudden over investment in infrastucture do not match up. Ofcourse all economies are complete and cannot be answered on a forums, so your point is moot. Your response is typical and common of those who cannot answer the question.

Infrastructure spending is infact to low on China when you account for their huge population and requirements to move this population. To create the required infrastructure will take decades longer. To date Chinas huge demand for resources over the past 10 years and huge growth over the past 30 years has only urbanised around 300 million people out of a population of 1,300 million.

It is only when you compare inftrastructure spending to western nations, it seems high even during our growth peroids. This however does not take into account Chinas much larger population, and the increased speed at which China is urbanising, faster then any previous modern nation.

China as large economy will ofcourse have slow peroids, as they all do. Its over all long term growth prospects are far from being fullfilled let alone even at the halfway point.

It is more a case of bear trying to find some straw to clutch at to bring down property prices when it has no economic basis.

For the ultimate cyrstal ball into the future, look to what the US military is doing. They are preparing for a world where China dominates Asia. What happens when Chinese becomes the worlds largest economy in 8-10 years time. If as you say and others who predict the downfall of China, why is the US military spending tens of billions of dollars on completely the opposite outcome. I think they may know alittle more then you or I on the subject. They are preparing for a time when China will be much more powerful, which cant happen if it crashes
http://mike-globaleconomy.blogspot.com.au/
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newjez
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Mike
5 May 2012, 04:04 PM
Your simplistic answers as to this sudden over investment in infrastucture do not match up. Ofcourse all economies are complete and cannot be answered on a forums, so your point is moot. Your response is typical and common of those who cannot answer the question.

Infrastructure spending is infact to low on China when you account for their huge population and requirements to move this population. To create the required infrastructure will take decades longer. To date Chinas huge demand for resources over the past 10 years and huge growth over the past 30 years has only urbanised around 300 million people out of a population of 1,300 million.

It is only when you compare inftrastructure spending to western nations, it seems high even during our growth peroids. This however does not take into account Chinas much larger population, and the increased speed at which China is urbanising, faster then any previous modern nation.

China as large economy will ofcourse have slow peroids, as they all do. Its over all long term growth prospects are far from being fullfilled let alone even at the halfway point.

It is more a case of bear trying to find some straw to clutch at to bring down property prices when it has no economic basis.

For the ultimate cyrstal ball into the future, look to what the US military is doing. They are preparing for a world where China dominates Asia. What happens when Chinese becomes the worlds largest economy in 8-10 years time. If as you say and others who predict the downfall of China, why is the US military spending tens of billions of dollars on completely the opposite outcome. I think they may know alittle more then you or I on the subject. They are preparing for a time when China will be much more powerful, which cant happen if it crashes
Well it can actually - they just increase their military spend and become more aggressive. Probably easier actually, because they don't have to worry about upsetting the Western trade partners. In fact, it is the growth in the Chinese economy that has kept the peace. Maybe this is what the US are worried about, the trantrums of a falling giant?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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BubbleBoy
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Mike
5 May 2012, 04:04 PM


It is more a case of bear trying to find some straw to clutch at to bring down property prices when it has no economic basis.
a) I am not a bear by any means and own real estate.

b) I am still waiting for you to support your assertion that I claimed the Chinese economy will slow down. Which I did not - as I said, I have no firm prediction on this point.

c) Why the made up personal insults? Because I have shown your debating skills to be.....subpar at best?
Edited by BubbleBoy, 5 May 2012, 04:39 PM.
My name is based on a Seinfeld character, not on a belief of a housing bubble.
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miw
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BubbleBoy
5 May 2012, 01:23 PM
Strindberg's point is not valid - if Chinese grows at a much slower rate, commodity demand will not necessarily be resilient.

The fact that commodity demand increases long-run is a separate matter.

From famous Sinologist/Economist Michael Pettis comes this prediction:

http://www.businessspectator.com.au/bs.nsf/Article/china-growth-predictions-chinese-economic-model-gd-pd20120504-TXV3X?opendocument&src=idp&emcontent_asx_financial-markets&utm_source=exact&utm_medium=email&utm_content=38214&utm_campaign=kgb&modapt=commentary

12. Non-food commodity prices are set to collapse over the next three to four years

“Collapse” is not too strong a word. China’s share of global demand for such commodities as iron, cement, copper, etc, is completely disproportionate to its size and almost wholly a function of its very high growth in investment. As investment growth drops sharply, as it must, global demand for non-food commodities will plummet.
That was a very interesting article. Michael Pettis makes quite a bit more sense than the vast run of China Analysts. His assessment of debt, where it is, and its possible consequences make a lot of sense to me and are probably very close to the money.

He is, however, a little guilty of taking a purely economic perspective. All things to do with China have to take into account the following political points as well:

1. The Chinese Communist Party is purely a vehicle for maintaining power for the elite.

2. These guys are quite non-idealogical in their outlook. The recent purge of Bo Xilai and sidelining of many of his supporters was as much about getting rid of idealogues as anything. Deng Xiaoping's famous "Black Cat, White Cat......" statement signalled the end of principle as a political driver in China.

3. There is a tacit agreement between the Chinese People and the Chinese government that goes like: "You keep delivering the economic goods and we *might* continue to tolerate you. Drop the ball on that one, and your arse is grass and 1.2 billion people are the lawnmower."

4. Delivering the economic goods essentially means keeping growth high enough that the backward provinces are moving forward slowly and not backwards.

5. 10 years ago, that rate of growth was about 8-10% on average. It has now arguably dropped to 7-8% because of massive investments in the poor provinces and the spread of productive industry into the "bottom third" provinces. If things continue, that rate will drop further.

In this light, Wen Jiabao's recent "guidance" of 7.5% growth that caused lots of ripples among the analysts should be seen as a lower-bound promise rather than as forecast. The Chinese central government will do whatever it takes to keep growth above the crucial level where backward provinces start to go backwards, whatever that level might be at the time.

They are also very hip to the harmful effects of investment rather than consumption-led growth and right now they have all kinds of brakes on investment. But when the chips are down, and they know that to fail means they will be out of a job (in China that means "Dead" for a top official. Literally), they will do whatever it takes, including mass privatisations, including printing money for investment, to stay above the quota. Nothing will be too harmful in the long term if it stops the axe from falling in the short-term. It is the "Greenspan Put" written in blood.

The sunny view is that the party will be able to manage the growth rate down over the next decade or two as they even up the productivity disparity between the poor and rich provinces. So far they are doing alright in my view. Problems come up. Problems get solved. Most things are moving in the right direction.

The pessimistic view is that sometime in the future the irresistible force will meet the immovable object and we will have really massive unrest, maybe civil war, maybe revolution. Chinese people I talk to think the Government can easily hold this scenario off until 2020. After that things become less certain.

So if you want to predict the course of Chinese economic policy (and hence demand for commodities, etc etc.) over the next 10 years, you only need to keep a careful eye on the GDP growth spread between Zhejiang/Jiangsu/Guangdong Provinces and Gansu/Hunan/Guangxi provinces. It's that simple.

So the trajectory of commodity demand in China is a big "it depends". I also think that Energy commodies have a good outlook in any scenario.
Edited by miw, 5 May 2012, 05:46 PM.
The truth will set you free. But first, it will piss you off.
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BubbleBoy
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miw
5 May 2012, 05:45 PM
That was a very interesting article. Michael Pettis makes quite a bit more sense than the vast run of China Analysts. His assessment of debt, where it is, and its possible consequences make a lot of sense to me and are probably very close to the money.
Yes, Michael Pettis is a very clever man with well thought out and articulated views on China's future. You probably know this, but in case you don't his web page is here: http://www.mpettis.com/

Maybe Mike can try to incorrectly claim that Michael Pettis is a just a disgruntled bear!!
Edited by BubbleBoy, 7 May 2012, 01:32 AM.
My name is based on a Seinfeld character, not on a belief of a housing bubble.
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NotFooled
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The Bear Whisperer

miw
5 May 2012, 05:45 PM
The pessimistic view is that sometime in the future the irresistible force will meet the immovable object and we will have really massive unrest, maybe civil war, maybe revolution. Chinese people I talk to think the Government can easily hold this scenario off until 2020. After that things become less certain.
One other scenario that is a favorite of authoritarian ruling elites: foster extreme nationalism and direct hate outwards towards a foreign nation. China plays with this technique sometimes, and could really ramp it up if the CPC feels overly threatened by the people. We could attacks against Japan, Vietnam, or the Philipines beyond the usual "fishing boat" conflicts.
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