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LORD COPPER: Is China the new Japan?


I am getting more concerned about the well-publicised conviction that China is the answer to all the world’s economic woes. We are to believe that its industrialisation is poised to drive the global economy out of its downturn and be the engine for the future (not least, apparently, metal brokers).

I just wonder.

I can recall a generation ago that the same role was predicted for Japan: economic leadership created by the strength of manufacturing ingenuity.

What happened?

Well, “Made in Japan” undoubtedly became the symbol of the highest quality in manufacturing, particularly of high-tech products, but ultimately the Japanese economy wallowed in a more-than-decade-long slump of mediocrity.

Lots of professional economists, with more claim to academic excellence than I, have attempted to explain what happened. But frankly, to anyone who remembers the heady heights of the period when, it was said, one block in Tokyo city centre was worth more than the entire state of California, the reason is not too hard to find.

The economy became a bubble, and that bubble eventually had to burst. The fallout from that is what kept Japan flat-lining.

Is something similar awaiting China?

It’s an interesting question. The policies pursued by the rulers have kept incomes rising for many years, but the position now seems to be that a growing part of the economy is dependent on investment, and the creation of credit to finance it.

Perversely, although we are familiar with the concept of a growing consumer market in China, recent statistics show a falling consumption share of GDP (currently about 34%), versus a 50% investment share (2011 figures).

My interpretation of that, together with anecdotal evidence of increasing bad loans, is that a hard landing becomes more likely. So, although the concept of the glitzy, high-rise coastal strip spreading wealth westwards is attractive, it may not be happening at the rate needed to keep the real economy expanding fast enough.

If we follow that western drift, we come to Chongqing, and recent political events there show potential signs of creating political fault lines.

Although we often tend to pay compliments to the way the leadership has opened up the society to allow a degree of free enterprise, the fact remains that China is a one-party totalitarian state. Historically, one-party totalitarian states implode, either from internal or external pressures.

(As an aside, I also wonder to what degree the apparent slow pace of the London Metal Exchange’s plans to have warehouses in China are related to concerns about the rule of law in a country in which things are changing so rapidly.)

Anybody who has been paying attention to the travails of Bo Xilai and his family, and acolytes who believe he is unique, is seriously delusional.

Political dictators, when they are in power, always line their own pockets.

The general estimates of Bo’s personal wealth seem to be settling on £150 million ($243 million), and strong rumours suggest that those engaged in moving politicians’ stashes abroad have shifted about £800 million. I have no way of knowing if those figures are correct, but they seem to crop up remarkably frequently.

Economic progress across the country will also bring greater education and a greater dissemination of information. Events in certain Arab countries over the last 18 months have demonstrated forcibly that people will ultimately not remain compliant.

China has a small – in relation to its population – cadre of professional politicians, who hold the reins. The dilemma for them is that economic growth, which is the good news story, almost inevitably carries the seed of their own downfall. My take on that is that it may slow economic growth.

So, the economy is perhaps not performing as well as some would hope and potential political problems exist, with their attendant influence on the economy. Anything else? Well, I’m certainly not an expert in China’s myriad ethnic minorities, but I believe some of the problems out in the far west, where ethnic and religious differences are pronounced, may become far more serious.

Has this got anything to do with metals?

Well, yes, I think it has.

Those who believe China is really the current engine for the metals markets are deluded.

Right now, the QE-driven warehousing and finance trade is what makes prices move. And if I’m right, and China’s continued uber-growth is not as much of a dead cert as it once seemed, then we really do need genuine recovery in the USA and Europe.

Lord Copper

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