INSIGHT into the OVERSIGHT: “Mining.com: China’s new 5-year plan brilliant news for mining”
As the CPC’s (Communist Party of China) perspectives on growth, consumption and investments shift, can we draw any definitive conclusions about the prospects for the mining sector, as is implied in this article?
Leading Chinese mining stocks reacted rather negatively to the series of news releases by the CPC on 29th of October. On the NYSE, Rio Tinto opened 2.13% lower and BHP Billiton dropped by 3.28%, whilst over on the Shanghai exchange, China Shenhua Energy opened 2.43% lower.
The objective is not so much to criticize the article itself, but rather more to give clear insights into market and economic trends, in the face of large scale public policy interventions in markets and other regulatory affairs.
To effectively evaluate the substance and message of this article, we will discuss recent announcements by the CPC and key developments in the Chinese economy. Being the first stage in the general industrial production process, mining is heavily exposed to general economic trends. We will, therefore, take a look at the most important concern of the global mining sector today –global growth – or lack thereof.
MUCH ADO ABOUT NOTHING? The obsession with GDP
“Beijing’s decision to let urbanization happen at a faster pace and to stick to its target of “medium-high economic growth” and to double-down on a long-stated commitment to “double 2010 GDP by 2020” is the real kicker.”
The government recently decided to target “medium-high economic growth” in its 13th FYP over 2016-2020 after GDP expanded by 6.9% in the July-September quarter, slower than a 7% increase in the previous quarter. This is in contrast to the 6.5% rate of growth required from 2016 in order to achieve the said goal of doubling 2010 GDP by 2020: a high asking rate. In reality, there is a more pragmatist view emerging from the central planners in recent times. In July this year, President Xi Jinping alluded to a “new normal” in growth rates: not fast growth, but an improved economic structure that relies more on the services industry, consumption, and innovation. He has been quoted as saying, “Of course, speed [rate of GDP growth] is not the only thing we care about. Actually we are more concerned about indicators such as employment, residents’ income and prices.” [emphasis mine]. Premier Li Keqiang has also repeatedly downplayed its importance and instead emphasised the focus on job creation and consumer confidence.
“CONSUMPTION-LED GROWTH”, or forced-feeding?
“Continuing to “raise consumption’s contribution to growth” is still an important plank and there is also a promise that “government will intervene less in price formation,” a clear reference to its botched stock market meddling earlier this year.”
If intervention in 1,700 stock prices has not worked, then how can it be certain that an attempt to raise aggregate consumption levels for 1.4 billion people will be successful? Decades of rising savings and investment levels can be a pointer towards increase in consumption-led growth. However, interventions in this area may, once again, fail. At the very least, this statement and the intentions behind it should be heavily scrutinized & researched further. The Xinhua press release (CPC vows less government price intervention) also contained bizarre oxymoronic statements from the CPC such as “The government will deregulate pricing products and services… and intensify targeted controls.”
Nevertheless, the overall emphasis was more akin to, “the government will cut red tape, delegate more power to local authorities and improve government services. To this end, China will try to overhaul state assets management, establish modern fiscal and taxation systems, and reform financial supervision.” The intention to move away from interventionary econ-management can only be welcomed: apparently, a true market-oriented reform.
NO TO OPEN MARKET; YES TO PRIORITIZE & ALLOCATE (i.e. yes to excel sheets)
“Wording from 2013 that mentions the establishment of “a unified, open competitive and orderly market system” which would play a “decisive role in allocating resources” is gone from the latest communiqué. For the next five years government plans to “encourage better allocation of resources” and the country will “prioritize quality and efficient development,” but tellingly it’s no longer (only) up to market forces to accomplish this.”
At this point, the Bullish Bear has a confession to make: it is an avid, unbounded, unapologetic lover of free markets – human activity thrives on the back of the price mechanism and the trial & error process of the marketplace. Little surprise then that this brazen admission of central planning can only be derided. Market manipulation can and has led to tremendous costs at the very least, and sometimes, outright disasters. The government’s forced lending policies and its central bank’s loose monetary policies have attempted to cushion declining real estate prices, which is a huge concern for the banking sector – Fitch estimates banks’ total exposure to property could exceed 60% of credit if non-financing is also taken into account. The Chinese government also took desperate measures to stop the sliding stock market, formed out of excessive margin lending, which in turn was an outcome of the shadow banking system’s speculative frenzy with easy money in slowing economic conditions.
A RAW STORY NEED NOT ALWAYS BE COOKED
“The communiqué issued yesterday provides only the basic frameworks of programs and policies with a more detailed plan only made public in March.”
If this is true, then it perhaps belittles common sense to appraise the so called communiqué as a de facto framework. Whatever happened to a bit of conservatism in stance: a bit of equivocation, which would demand that the view be qualified and constrained, somewhat, albeit temporally..?
Government policies are very often critical as they set the agenda for markets, industries and the economy. But analysts very often jump the gun and underestimate the flaws of central planning and the power of market forces.
What this article has completely overlooked and is becoming a bigger widespread concern, is the fact that global growth has been slowing dramatically. Last month, the IMF warned that global growth may slow to lowest since the 2008 recession. The US economy grew 1.5% in Q3, lower than a 3.9% expansion in the previous period and below market expectations. And growth in the EU fell to just 0.1% last quarter after a near 2-year recession. Growth in Australian Mining Production, heavily linked to Chinese industrial production, has slowed down consistently over the last four quarters from 14.6% Y-o-Y growth in 2Q2014 to 3.7% Y-o-Y growth in 2Q2015.
The Chinese economic story will take its own course, and the government’s policies lack clarity and conviction. Above all, we need some patience so as to be in a better position to evaluate opportunities in the Mining sector, and indeed, in other sectors. Let the chips fall where they may – sans the artificial stimulants and inflammatory interventions!