Tuesday, March 18, 2014

China’s Latest Central Plan (excerpt)

Yesterday morning, the FT included an article titled, “China reveals blueprint to expand urbanization.” Here is the gist of the story: “China’s leaders have revealed a plan for a multiyear round of state-led infrastructure construction that they hope will prop up the economy amid flagging growth, as they move 100m more people from the rural hinterland into the country’s growing cities. The Chinese government’s ‘National New-type Urbanisation Plan’, revealed on Sunday, envisions a massive building programme of transport networks, urban infrastructure and residential real estate from now until 2020.”

According to the article, the plan was ready about a year ago, but was delayed by “deep divisions between government departments and dissatisfaction from Li Keqiang, the Chinese premier, who has been a strong champion of the scheme.” Apparently, last week’s batch of weak economic indicators convinced the government that now is the time to go public with the stimulus plan. The China MSCI index is down 10.6% ytd in US dollar terms. Both industrial production and crude oil usage have flattened out over the past few months. Retail sales rose 11.8% y/y during February, the slowest since February 2011.

The article also notes that while China’s central planners are committed to growth based on more consumption and less infrastructure spending, “they insist that they must keep investment levels high in the short term to guarantee employment and political stability.” I’ve made this point in the past. Transitioning from export-led growth to consumer-led growth is easier said than done, especially after 30+ years of the former. While Chinese officials are struggling to make the transition, they are likely to rely on the same old formulas to sustain growth. The problem is that debt was an important ingredient in the old formula, and it is no longer as stimulative as in the past.

The latest central plan aims to increase urbanization from 54% of the population to 60% by 2020. Most developed countries are at around 80%. There are about 270 million migrant workers who are required to have hukou permits to work in the cities. They are not eligible to use any social services, including health, housing, education, or pensions in their new urban homes. This system will have to be dismantled over time to allow these workers to permanently urbanize.

Today's Morning Briefing: Peace In Our Time. (1) The bull’s dance routine. (2) China and Crimea were bearish last week, but bullish yesterday. (3) China’s latest central plan. (4) More urbanization and fewer migrant workers. (5) Transition is easier said than done. (6) Back in the USSR. (7) Kerry’s Chamberlain press conference. (8) Chauncey Gardner’s forecast for the spring. (9) More fairy dust coming from Yellen. (10) Ali Baba and his friends. (11) Bubbles and macro-prudential policies. (12) Focus on over-weight-rated S&P 500 IT. (More for subscribers.)

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