Michael Pettis sent out, via email list (no cost), a piece where he revisits his earlier predictions regarding China's economy and the matching model for the world-economy as a whole. I'd say this piece (now that the predictions are largely confirmed) represents the best piece of fundamental, macro-economic research I've read lately. I wish I could put a link up here. I'd say his predictions are working out nicely. Here's a link from earlier this year summarizing his predictions and how they are working out (click here).
Here's the 12 predictions:
"1. China will be the last major economy to emerge from the global crisis.
2. Chinese consumption will continue to stagnate or decline as a share of GDP until the growth model is abandoned.
3. Although there were many factors that explained both rapidly rising GDP and the contracting consumption share, financial repression would eventually be recognized to be the key factor.
4. Investment is being misallocated on a massive scale and this was not due to any special Chinese characteristic but was rather a fundamental requirement of the way the system operated.
5. Debt is rising at an unsustainable pace and debt levels will become unsustainable well before the end of the decade.
6. When specific debt problems are indentified, resolute attempts by Beijing to resolve them would be warmly welcomed by analysts but wholly irrelevant – because the problem of debt was systemic, not specific.
7. Privatization, a topic all but forbidden in polite company, would become a very hot topic of conversation by 2013-14.
8. As some policymakers gradually became aware of the problem with the growth model and the risk of crisis, a fundamental political split would emerge between those that demanded rapid reform and those that wanted to maintain control of resources.
9. Chinese government debt will continue to balloon through the rest of this decade. 10. If the transition is not mismanaged, average Chinese GDP growth rates will drop to 3% for the 2010-20 decade.
11. If China rebalances correctly, then much slower GDP growth rates will be accompanied by only slightly slower growth rates in household income.
12. Non-food commodity prices are set to collapse over the next three to four years."
What follows is my quick analysis regarding how this affects the precious metal investor.
Pettis' basic idea is that China's household income can continue to rise at a high rate (e.g. 6%/year) while the overall Chinese GDP grow slows sharply (down to roughly 3%/year). If this is true, it seems to me that:
(a) Chinese consumer demand for gold can continue to grow (provided their G-man doesn't get too restrictive with import restrictions, etc.) at a high rate (6%/year).
(b) Chinese demand for quality food will continue to grow (bullish for corn, wheat, soybeans, rice, etc.) at a high rate (6%/year).
(c) Look out below for copper, iron ore, etc. as Chinese investment demand growth drops sharply.
(d) Gold mining fundamentals (gold mining stocks) should be good because:
- of slower growth in costs (miners, mining equipment, etc is in lower demand from (c)) and
- continued high-demand (because of continued demand growth from Chinese consumers).