By Tirthankar Mukherjee
One way of not buckling under the Ulaanbaatar winter is to keep your self-esteem high, with artificial inflation, if necessary (as certainly in the case of yours truly). Only that can extenuate my choice of topic this month. But I know that many forecasters with overwhelmingly better qualifications will also be proved wrong if anybody checks next Christmas what they are writing this January. So here I go, with some randomly gathered thoughts on what the world economy might have for us and, nearer home, what the Chinese economy might have for Mongolia. News on the first Monday of the year showed that a slowdown in the Chinese service sector in December triggered a sell-off in London-listed mining stocks, as investors took fright at poor figures from the world’s top metals consumer. Rio Tinto dropped 3.1%.
First, the picture, where hope and fear vie for primacy. There have been many warnings that failure to learn the lessons of the 2007-09 financial and economic crisis means the global economy is heading for another meltdown.The unity of concern and purpose displayed in the first days of the crisis was quickly lost, and most of the many problems that led us to the brink have been left as they were, after some cosmetic repair. No one is sure when or if Governments and/or central banks will start drawing back the stimulus packages that have been the world’s economic lifeline.As far as this concerns Mongolia, the IMF said in December, “Mongolia is facing an uncertain external environment. Advanced economies will eventually exit from the very supportive monetary policies implemented in recent years. China’s economy is expected to rebalance away from a mostly investment-based growth model toward a more consumption-based growth model. Both these factors are bound to have major spillovers globally and especially in the region. Spillover risks will particularly affect the more vulnerable emerging market economies.”
All the emerging economies (emerging from where?) have extensive coast lines, and if and when the stimulus policy is reversed they will be engulfed by a tsunami. They have been flush with “hot money” courtesy of the QE activities of the west’s central banks, money that will leave faster than it came, leaving countries facing runs on their currencies.The most vulnerable emerging markets look to be those with current-account deficits, because they are likely to be the first targets for currency speculators. High on the list would be Brazil, South Africa, Turkey and India. The much-hyped BRICS countries will be seen as just that, no mortar.
The gest worry for Mongolia is, of course, China, another BRICS country but cuts above the others. It is now clearly slowing down after its debt-fuelled recovery from the last recession. Mining Minister Gankhuyag’s ambitious coal output figures may be met – though we are waiting to see how much coal was indeed mined in the last few months of 2013 – but who will buy it and at what price? If China’s appetite were to shrink, there would be no call to lightsome kitchen fires.
George Soros, wiser than most fellow hedge fund managers, has no reason to be overly concerned about Mongolia, but he knows a faltering China would be disastrous for everybody else, too. Taking a long-term view, he has said, “The growth model responsible for China’s rise has run out of steam.”
China began its second long march by restricting household consumption, channelling into industrial production the savings thus enforced. When the financial crisis hit, and much of the world stopped buying whatever was produced in“the workshop for the world”, there was only one way to keep going. Casting away its usual risk aversion, the leadership first allowed, then encouraged local authorities and other government agencies to borrow. Not very long after, there was alarm at public debt piling up, and the plan was clipped, only to lead to panic as the economy sputtered (by China’s own standards; the ‘low’ growth rate would have been the envy of most other nations), and there was a quick U-turn. Soros now says, “China’s leadership was right to give precedence to economic growth over structural reforms, because (these), combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved contradiction in China’s current policies: restarting the furnaces also reignites debt growth, which cannot be sustained for much longer than a couple of years.”
I write this on 8 January, and by the time this issue is published the stock market data I give might become irrelevant. But then they might not, too. These show the global impact of a slowdown in Chinese manufacturing output in December, and of the uncertainty and worry that this will keep slowing. The FTSE 100 is down 30 points since the new year break. It includes mining companies such as Rio Tinto and Anglo American, both with strong links to the Chinese economy. The price of many commodities has fallen, as is only to be expected, for China consumes around half of the world’s iron ore and coal, and buys more than a third of its base metals. An incidental detail: Beijing’s move to cut back on corn imports made the grain the worst-performing commodity last year, as it fell almost 40%. An idle thought: in the dictionary, coal comes before corn.
Before we go any farther, it is as well to remember that figures emanating from China do not have to be very trustworthy. They often say what people at the top want them to say at that point of time, for reasons of their own, but even if we doubt the veracity of the figures showing that the manufacturing sector grew at a slower pace in December as export orders weakened, there is general agreement that the economy is suffering a longer-term slowdown.The government estimates that the economy probably grew 7.6% in 2013, which would be its weakest performance since 1999.A fall from this to below 7% in 2014 could have serious consequences for the economy and social stability, especially after riots in 2012, which were ostensibly directed at Japanese goods but actually followed a sharp slowdown in output and wages.
The situation in the Chinese economy is simple: too little money and too much debt. But how much is too much in the world’s second largest economy? Well, local governments have run up almost $3 trillion in debt, mostly represented by quasi-soft loans from state-owned banks of one variety or another and typically applied toward infrastructure support for construction of high-end housing and flagship (extravagant) infrastructure projects.
To go to what started all the worry about China, an industry group, the China Federation of Logistics & Purchasing, said that its purchasing managers index for December declined to 51 from the previous month’s 51.4, where numbers above 50 indicate increasing manufacturing activity. The group’s spokesman blamed a decline in exports for much of the slowdown and lacklustre demand from domestic buyers. “There still is downward pressure on economic growth,” he told media.
The Chinese people may see no catastrophe ahead. For one, China has billions of dollars in foreign exchange reserves to soften any economic blow and, for another, the newly formed body led by President Xi Jinping to oversee regulatory changes will certainly do something. The problem is more for Mongolia, which can ill afford another year of low coal sales or prices or both.