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TBG in the News

Sep 02, 2008

Acupuncture may be used to cure any hangover, HighGrade

IN AUSTRALIA this week the mildly surprising news that business investment could surge by a further 34% in 2008-09 - which would apparently be the biggest jump in 26 years - would have been tempered in board rooms by the still disjointed messages coming from China. HighGrade sought some clearer indications from "Chinese Canadian" banker Howard Balloch, who was in Jilin City.   
We initially thought we might not get them. It was 6.30 in the morning and Balloch sounded like he'd had a good night with some city officials in Jilin, which shares its name with the north-eastern China province in which it is located. But there were no headaches, he said, just tiredness. "It was a good night," he confirmed.

What about Beijing after the Olympics party - were there signs of a hangover?
What about the rest of the country; would it feel the pain of a forced economic slowdown as government funding dried up?

Balloch, the former Canadian high ambassador to China and now Beijing-based investment banker and advisor, was in Australia last month to speak at the Diggers & Dealers mining investment conference at Kalgoorlie. There he gave a particularly bullish presentation on the long-term outlook for Chinese consumption of, and demand for, Australia's raw materials. He noted China's economy had been growing strongly for 30 years, not 30 months.

Some of the D&D attendees may have been worried about weather forecasts for Beijing during the Olympics, if they were planning on flying north for the big event, and many others just seemed out of sorts because of concerns that Chinese economic growth could be hit by a slowdown in the world economy. That would most definitely prolong the anxieties being fuelled by spiteful equity markets. In any case, Balloch's rousing speech was met with muted applause rather than rapturous cheering. There was a prevailing "let's just wait and see" attitude.

"I think China is still on its high," Balloch said down the line from Jilin.

"I don't think anyone has really thought that the party is over. Nor does that have any meaning yet economically. That's not to say there aren't people who are somewhat nervous about the party being over, but I don't think we're going to see any massive stimulus package like some people are talking about.

"The government of China has already demonstrated a willingness to intervene in the economy, but at a pretty precise level. It's a bit like Chinese acupuncture
- they'll use needles. So they will ease the reduction of the export rebate on leather shoes if they sense that the leather shoe industry is hurting because of exports to the US based on shifting currency values. They will take measures that try to respond to pretty disaggregated economic concerns. We may see lots of those kinds of measures, but I personally think the Chinese Government economic stimulus package will just go on and on. Government spending is not insignificant now and it is not likely to become insignificant."

Reports that the Chinese Government was "mulling over a major stimulus package", as one news service put it, were based on a research note from Hong Kong-based JPMorgan Chase economist Frank Gong that suggested: "The top leadership is carefully considering an economic stimulus package of at least 200 billion yuan to 400 billion yuan [$US58 billion], or 1-1.5% of gross domestic product".

Gong, who didn't quote a source of his information, added that a further 500-600 billion yuan was expected to be spent rebuilding parts of Sichuan province hit by an earthquake in May this year. Stimulus measures would include tax cuts and moves to stabilise Chinese stock markets and support the housing market.

Economic growth in China slowed to 10.4% in the first half of 2008 from 11.9% in calendar 2007.

Balloch said total Olympics expenditure was "not very much in an economy this size".

"Sure, the total amount of infrastructure spending and other Olympics related stuff, in specific local economies, has been relatively high," he said. "It was substantial enough that without sustained spending on infrastructure you could see in a sense a bit of a slowdown in some places.

"But other people say to me, yes but you need to remember in places like Beijing you had an intended slowdown in industrial activity over the last six months because of the Olympics, and so you've got pent-up demand that will now have to be satisfied with more activity.

"We don't have the faintest idea yet what level of activity we're looking at.

"What I can say is that the subway lines being built in Shanghai are continuing to be built. And so too in every other city where subways are being built. The fact that in a mad, fantastic and very well planned dash Beijing got a couple of new lines up and operating exactly on time [for the Olympics] doesn't mean that Beijing is going to stop spending on subways. They're actually extending some of those lines and spending on subways; maybe not at the frenetic pace they were before the Olympics, but it continues."

(HighGrade can remind readers that planned investment in Beijing's subway system is about $US10.8 billion by 2010 and that the city's underground network is expected to be the world's largest as by 2015 with 560km of rail lines and carrying capacity of 9 million people a day.)

"I remain of the view that I expressed at Kalgoorlie that, first of all, three months is insignificant: the long term is what counts. And the broad drivers of the Chinese economy are still here and I still see those broad drivers of the Chinese economy at work every day. There is still unsatisfied, substantial latent demand, and there is still a hell of a lot of entrepreneurial energy driving this economy in many areas."

Balloch said he hadn't detected any particular post-Olympics mood currents in China - beyond a "general high ... because everyone was very proud of their country doing as well as they did, and putting on as great a show as they did" - nor had there been any government rallying cry.

"I'm not sure that we're going to have something that will become a common government-led view of things," he said.

"I think the government must be thrilled with what has happened. First of all there was nothing that went wrong. It was a clean, competitive Olympics in which they [China] did very well, and they had lots of tributes from near and far. It was kind of imperial China redux.

"Last night we talked about some of the events, and one of the senior city officials was crowing about what a great basketball game the American-Spanish [gold medal play-off] game was, that he was at. It's [discussion] not all about China. It was a great event. And I think because China performed so well, the events they didn't win don't grate on them.

"More generally I think there is a sense that China is moving from a traditional feeling of inferiority, or of being a victim, to something else.
That's a psychological shift that I think might take some time to plumb. There has been a lot of painting China as a victim, in the world view. Well, it's very hard to sustain that now."

Reminded about his Kalgoorlie vow to go out and buy some "under-valued Australian mining stocks", Balloch would only say that "in the long term there are some good buys".

"Irrespective of these games of Pac-Man - of giants trying to eat giants - which of course always has a pretty important impact on stock prices, in the long run we are not going to return to low prices for nickel, the prices that we saw a few years ago, and we're not going to go back to US60c/lb copper," he said.

"The more the big companies spend money eating each other, and the less money they spend on finding and developing tomorrow's Escondidas, the more we're going to feel the pinch later on the supply side and if we do the prices are going to go up even further. They've come off their highs and they didn't belong at their highs, but they're certainly not going back to their lows.

"I like mining stocks, yes. But I don't tell anybody ever what to buy."
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