A plau­si­ble Chi­nese crash could un­nerve big com­mod­ity ex­porters

The National - News - - IN DEPTH BUSINESS - ROBIN MILLS Robin Mills is CEO of Qa­mar En­ergy, and au­thor of The Myth of the Oil Cri­sis

The dra­matic as­cent of the Chi­nese econ­omy, par­tic­u­larly since 2003, has en­er­gised com­mod­ity mar­kets around the world. Even as growth slows, China’s hunger is still ex­pected to dom­i­nate fu­ture de­mand for en­ergy and min­er­als. But what if the fire in the dragon’s belly were to go out?

The Chi­nese econ­omy, the world’s sec­ond largest, dwells in an enor­mous and com­pli­cated labyrinth. Lo­cal gov­ern­ments and state-owned en­ter­prises ma­nip­u­late data to meet cen­tral gov­ern­ment tar­gets. If a cri­sis of the mag­ni­tude of the 2008 fi­nan­cial crash could sur­prise pol­i­cy­mak­ers in the much more trans­par­ent US and Europe, it is not un­think­able in China.

After more than two decades of al­most un­bro­ken an­nual growth above 8 per cent ended in 2012, 6.6 per cent in 2018 was the low­est since 1990, the signs are al­ready that Bei­jing will set a lower tar­get this year, from 6 to 6.5 per cent. An­a­lysts’ ex­pec­ta­tions have for years fac­tored in a grad­ual slow­down.

Struc­turally, China faces a tricky tran­si­tion as the num­ber of work­ing-age peo­ple starts to fall, a hang­over of the one-child pol­icy. The coun­try has to move from catch­ing up to be­ing a tech­no­log­i­cal leader, and shift from heavy in­dus­try and ex­ports to­wards ser­vices and do­mes­tic con­sump­tion. In­stead of pro­mot­ing pri­vate busi­ness, state-con­trolled en­ti­ties have ag­gran­dised.

But could things get worse? An enor­mous ac­cu­mu­la­tion of debt, 260 per cent of gross do­mes­tic prod­uct, via var­i­ous stim­u­lus pack­ages, is likely to swell fur­ther in re­sponse to Amer­i­can tar­iffs.

This has long seemed un­prob­lem­atic, as the coun­try has lit­tle for­eign debt, and most lend­ing was by state banks which could be re­struc­tured if nec­es­sary. It weath­ered both the 1998 Asian cri­sis and the 2008 global fi­nan­cial cri­sis far bet­ter than its peers. But now a pro­fu­sion of provin­cial banks and shadow fi­nan­cial in­sti­tu­tions raises the odds and con­se­quences of a mis­cal­cu­la­tion.

In such an opaque sys­tem, of­fi­cial sta­tis­tics have to be sup­ple­mented. There are var­i­ous warn­ing signs: this month, Ap­ple said it was sur­prised by a fall in sales in China; and car pur­chases last year dropped for the first time in two decades. This may not por­tend a crash this year, but a se­ri­ous cri­sis in the next three to five years is plau­si­ble.

The slump does not have to be on par with the Great Re­ces­sion, it could be sim­ply a mild re­ces­sion, even a slow­down to 2 per cent growth dur­ing an or­derly re­struc­tur­ing. The com­mod­ity im­pact would be very dif­fer­ent from 2008’s western-cen­tric de­ba­cle. Chi­nese growth is much more de­pen­dent on raw ma­te­ri­als that are turned into me­trop­o­lises or ex­ported as ma­chin­ery, elec­tron­ics and plas­tic prod­ucts.

The coun­try is the world’s largest im­porter of oil, gas, coal, ura­nium, iron ore, cop­per, nickel, cobalt and alu­mina, the sec­ond-largest buyer of liq­ue­fied nat­u­ral gas and gold, and the third-largest im­porter of lithium. Min­er­als, met­als, chem­i­cals and en­ergy make up al­most 40 per cent of im­ports.

BP sees China as by far the big­gest source of new gas de­mand glob­ally to 2040, and the sec­ond big­gest gainer in oil con­sump­tion after In­dia. If its ap­petite fal­ters, oil and gas prices would fall sharply, and new in­vest­ment de­ci­sions for LNG plants would dry up. Rus­sia and Cen­tral Asia, par­tic­u­larly re­liant on China as a mar­ket for their oil, gas and min­er­als, would see multi­bil­lion dol­lar pipe­lines ly­ing idle.

It would be a dev­as­tat­ing blow for the more vul­ner­a­ble petro-states: Libya, Venezuela, Nige­ria and An­gola. Ma­jor min­ing na­tions would also be badly hit: In­done­sia’s coal; Brazil’s iron ore; South Africa’s gold, plat­inum and di­a­monds; Zam­bia’s cop­per; Aus­tralia’s gold, iron and coal.

A sharp drop in the value of the ren­minbi, and at­tempts by man­u­fac­tur­ers to offload sur­plus stock, would lead to a surge of ex­ports of cheap so­lar pan­els and wind tur­bines. That would be good news for coun­tries look­ing to in­stall large amounts of re­new­able en­ergy, but Europe and North Amer­ica would prob­a­bly erect “anti-dump­ing” trade bar­ri­ers.

The US’s resur­gent oil and LNG in­dus­try would also suf­fer se­verely, bring­ing re­ces­sion to states such as Texas and North Dakota. But the di­ver­si­fied and rather self-suf­fi­cient Amer­i­can econ­omy would come out of it bet­ter than many oth­ers. In­dia might also be rel­a­tively un­scathed. Still, there would be no safe haven in such a slump. Big com­mod­ity ex­porters can only partly in­su­late them­selves, by branch­ing out into new mar­kets with less Chi­nese ex­po­sure, di­ver­si­fy­ing their economies, and ac­cu­mu­lat­ing fis­cal re­serves.

The world­wide eco­nomic and po­lit­i­cal ram­i­fi­ca­tions would take years to un­fold. Pres­i­dent Xi Jin­ping’s in­creas­ingly au­thor­i­tar­ian, cen­tralised rule would be dis­cred­ited; he would be greatly weak­ened, or be re­placed by an­other leader, likely after a fac­tional power strug­gle.

China would turn in­ward, and Mr Xi’s sig­na­ture Belt and Road ini­tia­tive would likely be dropped, dry­ing up in­vest­ment in Cen­tral Asia and Pak­istan. Key Asian trad­ing part­ners of Bei­jing’s, such as Ja­pan, South Ko­rea, Tai­wan and Viet­nam, would also be badly hit.

Bei­jing has man­aged its way out of prob­lems be­fore. It may use its con­trol of the bank­ing sys­tem to deal grad­u­ally with im­bal­ances and make a smooth land­ing. The econ­omy still has a long way to go be­fore catch­ing up with the so­phis­ti­ca­tion of South Ko­rea or Ja­pan. But those who de­pend on feed­ing the Mid­dle King­dom’s ap­petite should plan for the day that it is sated.

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