There’s a great deal of talk about slowing economic growth in China. We heard this talk last year too. Indeed the incredible growth in China has gone on so far for 15 years, so shouldn’t it slow? So far no!

We have not seen a slowing down, ‘soft landing’ or anything but a firm hand on the tiller of growth by the Chinese Central government keeping momentum up around 10% and seeking to rein in only excesses. They are reasonably concerned that the growth should be maintainable in the long-term. Excesses serve no one, least of all China.

Guiding Growth

It is in this light that we must see the new controls being imposed in China. “China must maintain controls over medium and long-term lending and investment,” Chinese Premier Wen said. He also vowed to tighten rules on land sales, cut pollution, improve public finances and cap surging real estate in all major Chinese cities. Strong controls over such a burgeoning economy are vital as the present numbers show that Gross Domestic Product in the third quarter increased 10.4% from a year earlier, after expanding 11.3% in the previous three months. Second-quarter growth was the fastest in the last decade. To stem the excesses, China restricted bank lending and project approvals to bring about a gradual slowdown in investments [over-capacity is a present problem, requiring a catch-up in other sectors] in an economy that currently accounts for about a tenth of global growth. The government is encouraging China's 1.3 billion people to increase spending to sustain demand and underpin employment as the government attempts to rebalance the economy. Since April, the government has imposed curbs on land use and new project approvals, shuttered investments that flout government guidelines and ordered banks to slow lending. The central bank raised interest rates twice, forced banks to set aside more money as reserves and stepped up measures to drain funds from the financial system through bond sales. Money supply grew 16.8% in September, the slowest pace in more than a year. The rate on seven-day loans between banks has slipped to 2.6% from 2.89% on August 10^th, reflecting the increase is funds available. China will continue raising interest rates!

The Benefits for Chinese Society

Ideally the main driver of the Chinese economy [exports] should continue to feed the furnace of Chinese growth, but be joined by internal demand as the level of wages in China rises to create a larger and larger middle class and richer working class that promotes Chinese consumer demand and adds to the growth furnace of the nation. The government has limited Yuan gains to 2.6% since easing a peg to the $ in July 2005. One of its biggest concerns is the potential loss of export jobs resulting from a higher currency, which could lead to unrest among laid-off urban employees and China's millions of migrant workers. While curbing investment, the government has cut taxes, raised minimum wages and civil servants' salaries to encourage spending. The national savings rate is about double the world average. Retail sales in September rose 13.9% from a year earlier, the most since January, today's report said. [Wal-Mart Stores Inc. plans to spend about $1 billion to double its stores in China by acquiring Trust-Mart.]

Commodity Prices Lower?

Some economists have said that the encouragement of internal demand will be at the expense of export growth, itself causing a slowdown in the demand for commodities and metals and whilst we respect these opinions, they do not make sense when one looks at the objective of the Central government’s objectives. These opinions are expressed as a reason why the commodities boom should slow as well. Again we have difficulty with this. When a nation of 1.3 billion people reach out for development we have to track the extent of the development as it reaches more and more of the nation. We hear numbers like 400 million poor people just waiting to enter the cities for work. That is 33% more than the entire population of the U.S. China is only now passing the U.K. to become the world's fourth-largest economy. So the development has a huge distance to go before the all-powerful Chinese Central government reaches its targets. In line with these aims has to be the building of consumer demand internally so the dependence on exports drops down considerably. But this does not mean that exports will suffer, but that internal demand has to mushroom.

First - The reference to the negative impact on commodities has to exclude gold and silver. We have to emphasize that gold demand is largely separate from other metals and is a metal to be acquired as wealth, arising from the growth of the Chinese nation. Any ‘slowdown’ [if it does come] is most unlikely to affect the demand for gold, which is rising steadily at around 20% per annum [which is very slow in our opinion as the demand comes from a narrow sector of the Chinese population, close to government and not the Chinese nation per se].

Second – The criteria by which we assess the Western economies of the world have to be modified to gain an accurate assessment of the Chinese economy. It is unlike any other. A parallel with Germany before the last World War is pertinent at this point. After the Depression in the early thirties, the U.S. innovatively used stimulation to set its economy on a growth path. It was aware of the potential for war but did not adjust their economy for it until it burst on them. At the same time, and suffering a depression, Hitler was credited with stimulating the German economy by building a war machine, which then had to be used. So Hitler forced the economy to go as it did, a demonstration of just how a fully dominant government can control the economy.

The Chinese government wants to develop China to the point where it is a self-sufficient economy, self-driving as well as a supplier to the rest of the world. If it carries on at the present rate it will dominate the global economy and be one of its leading drivers, if not the main one, eventually. Yes, that is one or two decades time, but that is what the government of China wants and it will harness everything in its reach to achieve that goal. The Chinese government has an iron grip on its economy and will not be dictated to by Western economic principles, but will dominate economic growth. So, China’s economy is not the result of the different facets of the economy evolving as economics dictates, but is the result of a central government policy, which harnesses economic forces to achieve its goals.

What we see on the intransigent exchange rate policy typifies this point.

Our conclusion is that growth in China will continue at the fast pace we have seen for the past few years, but is now about to focus on internal growth so the Chinese people can feel the benefits of their increase in wealth. Consequently, the osmotic drift of wealth to the East will continue to feed the Chinese Trade surpluses and reach even further as it develops the skills to emulate Japanese penetration of the global economy of the last 50 years.

And the Impact on the Gold Price?

How will this affect the gold price? In terms of rising Chinese demand? - Very slowly until the gold distribution system in China develops to the point where small town gold prices are the same as those in Shanghai.

In terms of the evolution of the global economy, the impact of Chinese development will be dramatic as the flow of Capital to the East threatens the Balance of Power in the global monetary system. The $30-million-an-hour pace of growth in China's foreign exchange reserves took them to $988 billion at the end of last month. The trade surplus reached $110 billion through September, already exceeding last year's total, and economists forecast the gap will widen to more than $150 billion this year. As the sheer weight of capital flows into the ownership of the Chinese [either in U.S. Treasuries or other currencies] so its control over those currency [and Treasury] markets grows. 

More importantly the longer they keep the $ strong in this way, the easier it will be for them to tap more developed nation’s wealth through a continuing and even rising flow of capital to China. Any diversification from the U.S.$ or the imposition of the Yuan as a global reserve currency, by China will weaken the $. However, until they have a firm grip on the global economy through Trade and Capital investments, they are unlikely to use such power as it will reduce the spending power of their surpluses. 

In the meantime the potential threat from this source will encourage more and more investment in gold.

© 2006 Julian D. W. Phillips
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