Article published by José Alberto León Alonso in El Día on 10/04/2015.
For about two years I have been expressing my concern about the irrational growth that has been fueling the Chinese economy, creating bubbles in the financial, real estate, stock market and raw materials sectors. Liquidity tensions, stock market crashes and skyrocketing rates in the interbank market. Something is brewing in China that greatly reminds us of the preludes to the credit crisis that arose in the summer of 2008 in the United States, and which ended up exploding in October of that same year with worldwide effects.
Fifteen years ago, the Chinese Government opened the ban for citizens to acquire their own home and become owners. Three decades later, the result is dozens of ghost cities, empty housing estates and closed houses dotted throughout the country. Since the Chinese do everything in a big way, they have built the largest real estate bubble in history. Currently, the construction of buildings accounts for 25% of the country's economic activity (in Spain it did not exceed 15% at its peak) and between 12 and 24 new cities are built each year. The price of housing in Beijing multiplies the annual disposable income by 23 times, and in Shanghai by 16 times, when a ratio greater than 5 is already considered worrying.
How has this real estate bubble been financed? Through “shadow banking” with financial vehicles in the style of the subprime that led to the bankruptcy of the large North American banks in 2008. Wealth Management Products (WMP) is the name of the Chinese subprime. These are financial instruments of banks, which raise money and lend it but outside their balance sheet and the usual channels and supervision, with the classic associated liquidity risk: savers have lent money, which will have to be returned within a certain period, but the final investment for which the money has been allocated is not liquid, that is, it cannot be “sold” at that time to recover the capital or has even failed. Not to mention the proliferation of pyramid schemes where new WMPs cover the interests and losses of previous WMPs. Forum and Afinsa, but in a wild way.
In my previous articles on the subject, when asked what would be the next bubble to burst, I ended up betting on raw materials, and look where the predictions sometimes come true. The fifteen months of free fall in raw materials have now become a full-fledged crisis and have turned out to be the trigger for the bursting of the rest of the bubbles in the Chinese economy, whose stock market is a roller coaster that threatens to derail. Bankruptcies occur in half the world in companies dedicated to the exploitation of natural resources and their distribution. The Japanese shipping company Daiichi Chuo goes bankrupt due to the fall in global demand. Alcoa, the largest aluminum producer in the US, announced that it would split into two to deal with excess production. The oil company Royal Dutch Shell confirmed that it was abandoning its explorations in the Arctic after spending 7 billion dollars. And Glencore, the once all-powerful raw materials broker, plummeted more than 30% on the London Stock Exchange a few days ago, a symbol of the era that is coming to an end. Glencore precisely went public in 2011, and since then it has lost 75% of its value. Other companies outside the sector, such as the heavy machinery multinational Caterpillar and the chemical company Huntsmann, are being affected by the shock wave of the raw materials crisis. The first announced last week that it would reduce its workforce by 9%, 10,000 jobs, due to the problems in the mining sector, while the second suffered its worst fall in four years after publishing that low titanium prices were going to affect its third quarter profits.
The underlying reason for the crisis in raw materials is based on an economic foundation, the theory of commodity super-cycles by David Jacks. The theory of commodity super-cycles was formulated by Jacks in his study From boom to bust: a typology of real commodity prices in the long run, where he analyzed the behavior of raw materials during the last century. In general terms, raw materials have doubled in price since 1950 and have tripled since 1900. Jacks concluded that, in the long term, raw materials move in super-cycles or very long period cycles, in which price fluctuations are very high and last about forty years. The highs of gold and silver were reached four years ago, the collapse of oil since June 2014 has been intensified by OPEC's decision not to cut production and natural gas prices in the US have fallen to less than a quarter of what they were in 2008. A long bearish cycle now begins for oil, natural gas, gold, steel, nickel or lead, in which bad decisions must be purged. investment.
What could be the outcome of this crisis? China is the world's leading consumer of raw materials, with between 40% and 60% of global consumption of tin, copper, steel, nickel, aluminum, zinc, and lead. Countries whose economic growth is based on the export of these materials (Australia, Canada, Latin American and African countries) will see their growth truncated if this demand slows down. And the rest of the countries would suffer from the fall in global demand, as well as the rise in public debt, since neither the Chinese nor emerging countries would be able to continue financing it. This increase in cost would make it difficult to refinance the huge amount of public debt generated during the crisis, and the risk premium would once again be present in our daily conversations, as it was until recently. The impact probably wouldn't be as pronounced as the Lehman Brothers crisis of 2008, but it wouldn't be innocuous either. After all, 50% of the growth of the world economy in the last ten years has been generated by China. Hold on, curves are coming.
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