What’s really happening in China: Kohler

The optimism of the 2020 Summit over that weekend in April seems a long time ago now. With its focus on creativity, governance, indigenous issues and sustainability, it already feels like part of a lost Australian era.

Professor Glyn Davis, who runs an exporting business called University of Melbourne (he and his staff teach 11,000 foreign fee-paying students), was in China last week visiting his main market.

Usually, he says, when students return to China with their Melbourne degrees, it’s just a matter of choosing which job to take. The cost of the degree is more than covered by the salary premium they command; the investment is always worthwhile and the demand for places is therefore always strong.

Last week Davis found that most of the graduates he had sent back in July were still looking for jobs. The few who were now employed had found that their salary premium had shrunk dramatically.

The Melbourne University vice-chancellor, and convenor of the 2020 Summit a few months ago, had another indicator to share with a small group over lunch at Austrade yesterday; he just received his first letter from parents – in Singapore as it happens – asking to defer their child’s tuition fees because the father has just lost his job in the financial sector. He agreed, but expects to get many more of these letters.

The optimism of the 2020 Summit over that weekend in April seems a long time ago now. With its focus on creativity, governance, indigenous issues and sustainability, it already feels like part of a lost Australian era.

The final report from the economic stream chaired by former Westpac CEO David Morgan, entitled “Future of the Australian Economy”, opened with these words: “Big challenges confront the Australian economy – among them the reality of ongoing economic change and competition, the aging of our population, climate change, and the continued projected expansion of China and India. We must be ready, and we must devise ways to grasp the opportunities presented in a way that reinforces our national values of opportunity and fairness.”

Now, just six months later, we must devise ways to survive the decline of China and India, and none more than the convenor of the summit, and Australia’s largest exporter of education to Asia.

Andy Xie, the Shanghai-based economist who used to work for Morgan Stanley, said at a conference in Dubai recently that China is actually in crisis: “Forty percent of its GDP is generated by exports. Now, for the first time ever, exports are grinding to a halt. In addition, the real estate bubble has burst. These two sectors were responsible for more than half the annual growth in our GDP.”

On Monday the Chinese Government reported that GDP growth had slowed from 11% to 9%, its slowest growth for five years. Sherman Chan, an analyst with Moody’s in Sydney, told the Los Angeles Times yesterday that if growth in China dips below 8%, the conditions would be equivalent to a recession.

A consumer products analyst based in China, Michael Dunne, said: “China will not compensate for falls in the rest of the world. It’s not going to be the saviour.”

Yesterday I discussed the fall in the Baltic Dry Index of shipping rates caused by the refusal of banks to produce letters of credit, which is causing shipping to grind to a halt.

A trade adviser based in Sydney, Sri Annaswamy, wrote to me last night to correct me, explaining that it’s not that shipping is being affected by the credit crisis – it’s that banks don’t want to open or honour letters of credit “that they know would ultimately be defaulted upon due to the Chinese buyer’s refusal/inability to accept the shipment (that’s the core of the problem)”.

In other words, the problem with shipping, as he sees it, is not an extension of the counter-party risk issues that are crushing the credit markets – it’s caused by a more fundamental concern about the future of the Chinese economy.

By the way, Sri kindly forwarded to me an email he had sent to his clients yesterday explaining why the decline in the Baltic Dry Index points to a global recession, and is perhaps the best economic indicator that includes China. It is worth republishing in full:

“The Baltic Dry is a composite index of shipping freight rates across 20 odd major dry bulk carrying routes and covers all three types of ships – capesizes, supramaxes and panamaxes. The index is dominated by the large capesizes (150,000 tonnes plus) ships which operate on both time charter and voyage charter basis and typically carry raw materials for steel manufacturers (iron ore and coking coal mostly) who in turn make steel for automobile manufacturers as well as building and construction companies.

“As the supply capacity is very difficult to adjust up and down (large capesizes cannot be created or destroyed without at least a few years time), it gives an accurate indicator of the forward-looking volume demand for iron ore and coal from manufacturers. Hence, it serves as a very reliable forward indicator of the level of global manufacturing activity.

“For example, if steel makers are buying more iron ore, it means their projected demand from car companies and builders is looking very strong, and vice versa.

“China obviously is the biggest iron-ore and coal demand driver, and Brazil and Australia are the biggest iron-ore supply drivers.

“Because it is not distorted by financial market considerations and impacted mainly by volume shipped, it is a very robust indicator of the level of global trade and economic activity (in my opinion).

“Hence it points to a serious global recession, now, in my view.”

This article first appeared on Business Spectator