MONTREAL - It is not as surprising today
as it might have been - before all the ink about
"globalization" was spilt then washed away by the
shifting tides of continuing global financial
crisis - that Chilean mining industries could
influence the developed world's economic growth.
However, too-high copper prices might
squeeze Chinese profit margins enough for its
industrialists to produce less for consumers to
buy in Western countries. That would hurt the
latter's gross domestic product. (For background,
China
on a razor's edge, Asia Times Online, July 23,
2010.)
Such interconnections exist and can
still be subtle enough to surprise. Those just
mentioned account, in part, for the recent
weakness on Chinese equity
markets and for increased uncertainty over Asian
economic growth in general.
As reported by
Bloomberg News, Chinese mutual funds have
decreased their equity holdings lately also out of
concern over a possible further rise in domestic
interest rates (already raised four times since
the end of the 2007-08 global financial crisis), a
possible fall in production capacity due to power
shortages, and a possible nationwide extension of
a new property tax. This last is designed to
dampen speculation but could also put ownership
further out of reach for an increasing proportion
of the younger age cohorts of the population, as
even existing home sales fell to a 28-month low in
May.
These are all hypotheticals rather
than actual events, although it is true that China
announced on May 30 that it would (for the first
time since November 2009) increase retail
electricity prices for commercial and agricultural
users in order to reduce demand and increase
incentives for greater power generation.
The fact that hopes and fears count for
more at the moment than do actual perceptions, not
to mention actual reality, suggests investor
nervousness that will increase volatility in the
stock markets even as it increases inclination to
avoid risk. As of Monday, Chinese stocks had
fallen for eight consecutive days, the longest
such decline since December 2008. Before rising on
Tuesday, the bellwether Shanghai Stock Exchange
Composite was by the close of trading on Monday
this week, down 11.5% from the year's high reached
April 18 and down 14.3% from the 12-month high
reached last November 11. (For detailed technical
notes, see Tired
Asian bourses catch breath, Asia Times Online,
May 28, 2011.)
The power shortages are
serious, and the price hikes will factor into
inflation fears in the medium term. Inflation has
already been over the government target of 4%
every month this year, reaching 5.3% in April.
Summer threatens the worsening of existing power
shortages at the time of the summer harvest
(possibly worse than until-now worst 2004
shortfall), at the same time that price rises in
the cost of electricity threaten to exacerbate
inflation.
According to Citibank, as
reported by Bloomberg News, electricity rates for
residential consumers may rise in the second half
of the year. All this raises new fears of an
economic slowdown in China, even though the
consensus growth estimate for the country is a
little over 9% for the present year. Investment
funds have been rotating out of Asia and into
developed markets since early this year exactly
out of such fears of inflation and slowdown.
Since the start of the year, economic
observers have been wary that inflation in Asian
economies could slow down their growth by the time
the second quarter rolled around. They may have
been a bit premature, but such fears look like
materializing in the second half of the year.
These tendencies are even more evident in
Asia's most volatile market after China, which is
India, where annualized growth estimates have
slowed to 5.4% and inflation levels threaten to
exceed 10%. Rajiv Kumar, director general of
India's Federation of Indian Chambers of Commerce
and Industry (FICCI), just promoted to its
secretary general and writing in a personal
capacity, points out that the Reserve Bank of
India's interest hike in early May threatens to
worsen the slowdown by further discouraging
investment unless the government couples its
fiscal action with action on monetary policy.
Thus while one could reasonably argue that
this newspaper's weekly Market Rap foresaw both
the Shanghai and Mumbai stock market declines on
the basis of short-term technical market analysis
(see India
leads slide, Asia Times Online, May 10, 2011;
Hunt
the positive, Asia Times Online, May 17,
2011), still "economic fundamentals" such as those
mentioned in the lead paragraph provide a
complementary substantive interpretation.
In particular, it is useful to return to
the question of copper supply; the metal is a key
indicator of economic health because of its use
throughout industrial production. Moreover, it is
extensively used in pipes and roofing for
residential construction as well as in many
household consumer goods: precisely those things
the emerging middle classes in Asia will demand
more of in years to come. (See China's
demand bends copper value, Asia Times Online,
July 24, 2009.)
Even if the economies of
both China and India slow, therefore, copper
prices will remain high because it takes so long
for new mines to be opened for new supplies to
come into the market. The International Copper
Supply Group, an industry research institute with
a Chinese vice-chairman, notes in a new report
that satisfying emerging-market demand for the
metal is complicated by a syndrome combining lower
ore quality with higher costs because new mines
are deeper.
Supply will remain tight into
the long term. However, it is also true that,
thanks to its massive foreign-exchange (mainly
dollar) reserves, China will be able to buy as
much copper as it wants any time it wants. The
recent high prices, together with fears of a
slowdown in Asia, have temporarily depressed
global demand by discouraging stockpiling. But
even if China will not clear the market, it has
the potential to do so anytime it chooses.
The important implication of this fact is
that there are other parts of what used to be
called the "developing world", mainly outside
Asia, where demand will not be met simply because
there is not enough copper to go around. This fact
foreshadows an increasing global stratification of
the post-crisis recovery that will only increase
the generalized political unrest already evident
in several parts of the globe.
Dr
Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
(Copyright 2011 Asia Times Online
(Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
