(…) China has exhausted this top-down state-led strategy we see in the early stages of a developing economy and now has to transition to a more diversified bottom-up model, Dr. Brock said.
“The problem is, when you want to get to (stages) four and five – and here is where incentive structure logic comes in – everything reverses,” he said. “(China) can’t become a decentralized, market-based, efficient consumer economy, unless the communist party on top lets go, which they’re not likely to do. You need bottom-up (growth) … you need you and me to start a business. And you need 10 million others to start businesses all the time.”
This is the main impediment China faces, in Dr. Brock’s opinion.
“China will have a very hard time, in my view, with this transition from top-down to bottom-up type of economic growth,” he said. “The communist party doesn’t want private property rights. … I do not believe China can cope with the challenges of becoming a full stage-five economy without radical political reforms, decent … infrastructure, taking power away from the communist party, and decentralizing the whole story.”
Ultimately, this means China is likely to grow at a slower pace, he said.
“I don’t believe the 7 percent they’ve been maintaining – and I think it’s much lower than (what) they claim right now from what I know – is sustainable in the longer run,” he said. “I’m more a 4 or 5 percent long-run growth guy, not 7 (percent), and the difference is huge when you compound that over 30 years.”
China’s sizeable debt obligations also worry investors, but Dr. Brock thinks the country has the resources to manage its debt.
“Those who are bearish today about China … look at the massive debt, and they see real problems for growth in China,” he said. “And there is an awful lot of debt, and it is a problem. I believe they can deal with this. The central bank has trillions of reserves. … It is a big problem for the short run. I think China can cope with it. … It’s going to hurt them and it will certainly (cost) them short-term growth, as it is now.”
Demographic hurdles may also impede Chinese growth, but Dr. Brock pointed out that there are several ways the Chinese can deal with it, including possible changes to the one-child policy and worker productivity.
“When you add it up, the notion that demography is destiny is wrong,” he said. “You can equally well say life expectancy is destiny.”
The end result is, China is unlikely to become a stage 5 political economy anytime soon, and Dr. Brock thinks that as a result GDP growth will slow.
Listen to this full interview with Dr. Woody Brock by logging in and clicking here.
Commodity Weakness Persists (Excerpted from the August 2015 edition of A. Gary Shilling’s INSIGHT)
(…) Copper is our favorite industrial commodity because it’s used in almost every manufactured product and because there are no cartels on the supply or demand side to offset basic economic forces. Also, copper is predominantly produced in developing economies that need the foreign exchange generated by copper exports to service their foreign debts. So the lower the price of copper, the more they must produce and export to get the same number of dollars to service their foreign debts. And the more they export, the more the downward pressure on copper prices, which forces them to produce and export even more in a self-reinforcing downward spiral in copper prices. Copper prices have dropped 48% since their February 2011 peak, and recently hit a six-year low as heavy inventories confront subdued demand. (…)
We’ve written repeatedly that anyone who thinks that owning commodities is a great investment in the long run should study Chart 9, which traces the CRB broad commodity index in real terms since 1774. Notice that since the mid-1800s, it’s been steadily declining with temporary spikes caused by the Civil War, World Wars I and II and the 1970s oil crises that were soon retraced. The decline in the late 1800s is noteworthy in the face of huge commodity-consuming development then: In the U.S., the Industrial Revolution and railroad-building were in full flower while forced industrialization was paramount in Japan. (…)
Commodity Price Outlook
Commodity prices are under pressure from a number of forces that seem likely to persist for some time.
1. Sluggish global demand due to continuing slow economic growth.
2. Huge supplies of minerals and other commodities due to robust investment a decade ago.
3. Chicken games being played by major producers in the hope that pushing prices down with increasing supply will force weaker producers to scale back. This is true of the Saudis in oil and hard rock miners in iron ore.
4. Developing country commodity exporters’ needs for foreign exchange to service foreign debt. So the lower the prices, the more physical commodities they export to achieve the same dollars in revenue. This further depresses prices, leading to increased exports, etc. Copper is a prime example.
5. Increased production to offset the effects on revenues from lower prices, which further depresses prices, etc. This is the case with Brazilian sugar producers.
6. The robust dollar, which pushes up prices in foreign currency terms for the many commodities priced in dollar terms. That reduces demand, further depressing prices.
It’s obviously next to impossible to quantify the effects of all these negative effects on commodity prices. The aggregate CRB index is already down 57% from its July 2008 pinnacle and 45% since the more recent decline commenced in April 2011. To reach the February 1998 low of the last two decades, it would need to drop 43% from the late July level, but there’s nothing sacred about that 1998 number. In any event, ongoing declines in global commodity prices will probably renew the deflation evidence and fears that were prevalent throughout the world early this year. And they might prove sufficient to deter the Fed from its plans to raise interest rates before the end of the year.