China Is Making A New 5-Year Plan
And It'll Decide The Fate Of The Global Economy
By Jim Edwards
October 19, 2015 "Information
Clearing House" - "Business
Insiders"
- Between October 26 and October 29, the 18th Central Committee of
the Communist Party of China will hold its 5th annual "Plenary
Session," and announce the country's 13th Five-Year Plan.
That might sound like a bunch of Mao-ist gobbledook to most of us in
the West, but if you're interested in where the global economy is
heading next, this is The Big One.
China will use the plenum to set its GDP growth rate for the next
five years.
And if delegates start talking about any number lower than 7%, you
can expect markets and projections to tank planet-wide.
You might think this won't affect you because you're not Chinese.
Wrong. China represents 32% of all global GDP growth, and about 30%
of global capital expenditures, according to Credit Suisse. In other
words, If China sneezes, the rest of us will get pneumonia.
Here is the context: Over the last
five years, China has promised to deliver GDP growth of around 7%.
But growth in China has slowed recently and many economists have
begun to suspect that China's self-reported GDP numbers are
basically lies. Andrew Garthwaite, an analyst at Credit Suisse, last
week said in a note to investors that China's real growth rate may
be as low as 3% — or 400 basis points below where premier
Li Keqiang says it is.
At Business Insider,
we've been tracking as much data as we can find that suggests China
is nowhere near 7% growth. One example: The
price of cement — the one thing you need to build anything and
everything — has dropped 25% in the last two years.
Now, people are used
to the idea that China isn't telling the truth about its real
growth. So they discount the number. But if the next Five-Year Plan
were to name a number lower than 7, then everyone's discounted
models would be racked down one notch as well, to compensate.
And that is a lot of
models, at a lot of companies. The global mining giant Glencore, for
instance, is really banking on continued demand from China for
copper, another material you need if you're building anything:
Citi
The price of copper
could collapse, and Glencore's stock with it, if China says
something like, "Actually, we're not gonna make 7% for the next few
years ... sorry guys!"
Two analyst teams at
two investment banks put out notes last week that said China is the
scariest thing on their radars. Here is Andrew Garthwaite and his
team at Credit Suisse:
China concerns: China was the number one topic [of
concern among clients]. The currency and PMIs were seen as key
barometers. Clients agree that 'real' data (even on the consumer
side) are consistent with just 3-4% GDP growth. China has never
faced a downturn when it has been this large (32% of global GDP
growth and c30% of global capex) and has had such excess in
investment, credit and real estate.
And this is Hak Bin
Chua and the team at Merrill Lynch:
We worry about the next phase: the leverage channel
where the financial difficulties faced by commodity-related (e.g.,
Glencore) or leveraged-China companies could set off a contagion
which could hurt the rest of Asia via bank exposures. Recessions or
downturns accompanied by banking problems are often far deeper and
last longer. The debt-linkages remain a tail-risk but the tail is
probably getting fatter.
To sum all
that up in plain English:
- China's
economy is slowing.
- The demand
for things like Glencore's copper has collapsed over the last
five years.
- Everyone is
worried about banks that have loaned
money,
or have credit default swaps, where the value of those bets
is dependent on underlying assets like copper.
- If it all
goes wrong, this may trigger a recession.
According to Citi
global chief economist Willem Buiter,
that recession is "likely" and "global."
And yes, there
is a chart describing that, from Credit Suisse. Note that sentiment
roughly tracks global GDP:
Credit
Suisse
So! What will the
Chinese Communist Party do next? Unfortunately, they're likely to
add angst to the mystery by NOT naming a new target GDP number.
It's a guessing game,
according to Deutsche Bank chief economist Zhiwei Zhang:
While there
are still uncertainties on the growth target in the 13th Five-Year
Plan, people’s expectations seem to have zeroed in on two
possibilities, 7 percent or 6.5 percent. Currently we believe that
the likelihood of keeping 7% growth target is slightly higher than
cutting it to 6.5%. The two possible targets will have very
different implications on policy outlook. If the target is set at
7%, we believe the government will have to maintain its loose policy
stance and do more easing. As a result, the leverage of the economy
will continue to rise. On the other hand, if the growth target is
set at 6.5%, it means the government will tolerate slower growth to
allow more space for structural adjustments. In this case, we expect
there will be less stimulus efforts by the government.
The problem with that
is, we won't know how much trouble we're in until it's too late.
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