China bull James White on the prospect of transiting into a mixed model – Singapore style.
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China Update: Corruption crackdown, slower growth and Singapore
By James White
Source – An Abundant World, published May 30, 2013
Back at the start of the year I wrote a bullish synopsis of the outlook for China in 2013 and 2014. It seemed to me that growth would accelerate in 2013 from the lows of August 2012 to towards 9%. It also seemed, to me, that inflation would be very subdued and allow growth to be robust for a 24 month period before any move to aggressive tightening was made. Three or four months later I remain confident about subdued prices and the outlook for 2014. But clearly the outlook for the current year has weakened dramatically. The question is why?
Obviously, I don’t fall into the China bear camp. There’s still substantial growth to come in China. But undoubtedly, activity is not as robust as I suspected it would be.
The answer for me is the corruption crackdown and it’s fallout.
Please click here to read the full article at An Abundant World.
Corruption is hitting hard
Retail sales in China have slowed quickly in the last six months. From an average of 18% in late 2011, the 12 month average for retail sales has fallen to 13%. Many have put this down to the corruption crackdown; I think it’s undoubtedly the case.
Here are some of my own examples of the strength of the corruption crackdown:
A colleague recently traveled to Asia and Europe. They noticed the absence of Chinese in Hong Kong’s luxury goods emporia, but found it was only Chinese in the same emporia in Europe. Similarly, another colleague highlighted the instance of a Chinese buyer paying $2million above market for a property on Sydney’s North Shore. Then there’s a friend who sold an asset to a Chinese official for a large sum: a sweetener in the exchange was a passport and right of abode to a small country outside of Asia. Finally, I heard the story of a Chinese visiting a friend at Chinese New Year. The friend had become a local official. Rather than meet at a local restaurant, the friend asked to meet at home. This was the only way to avoid ending up on weibo.
Personally, I think the biggest move was last year under the old regime. The arrest of the Kwok brothers, heads of Asia’s most valuable property REIT Sun Hung Kai, was a clear signal that the regime was shifting on wealth and corruption. As a friend noted, the regime in Beijing are grateful to Hong Kong for the role it played in opening China up, but don’t stretch the friendship. This may well include attempts to pass on the wealth.
So what’s happening?
The crackdown is real. It’s changing behaviour. Corrupt money feels less at home in places such as Hong Kong and Macau. But similarly, it’s accelerating the shift of money and individuals to places further away, such as Europe. Social media has become a friend of the Standing Committee. China’s become self-policing in a way. Don’t go spending money in public.
So what happens next?
I think there are three outcomes from this crackdown.
Clearly, growth is going to be slower. The high spending created a lot of froth, particularly in retail sales, that is unlikely to re-emerge anytime soon. It may be that we’re talking about weaker growth into 2014. And it won’t just be Chinese retail sales. As was discussed back in November, it’s going to be widespread, luxury goods, Hong Kong retail and Macau’s gaming revenues.
On top of slower growth, money keeps leaving China. If you have money in China not tied up in a productive asset, best move it on. As I mentioned above, this has been an issue for some time and will continue to be so. One of the key issues here is that money has very little value in China. As I’ve explained elsewhere, money can and of course does provide material comforts, but it does not buy power. The true power comes from the political process and it’s not a pile of money that wins the day.
Most importantly, the crackdown on corruption in China requires a shift back to the pre-2009 model of economic growth and infrastructure funding. As George C Currie notes in this piece, so much of China’s infrastructure investment has been funded from equity, rather than credit. It has only been in the last four years that an alternative, credit-driven model emerged. A return to equity funding will signal the seriousness of China’s corruption consequence. It will also have consequences for banks, it will slow down investment in infrastructure during the transition and, positively, will see the emergence of lower levels of debt in the economy. The credit driven model is fundamental to the up-shift in corruption observed from 2009 and it’s destruction is the only way to properly slow corruption.
What does all this mean?
Slower growth and all is one thing but I suspect this needs to be seen as part of a transition: a transition to the Singaporean model. Rather than pursue the red-in-tooth capitalism of Hong Kong, it’s the mixed model of Singapore that most appeals. Rubbing out petty corruption is a step in this direction.