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Daily Archives: April 21, 2009

O’Neill calls China "red hot"

Interview of Goldman Sachs chief economist Jim O’Neill on global economic outlook. He expects positive GDP growth in the US in 3Q, and he says many economists will have to revise their forecast on China’s growth, to a much higher level.

Copper as leading economic indicator, Part 2

Weekly chart of Copper May 2009 future price:

(click to enlarge; source: WSJ Online)

To follow up my previous post on Copper as leading economic indicator, here I show you some recent data (courtesy of BCA research) that seem to confirm the story.

The first graph looks at the correlation between copper price and global industrial production (IP). Several interesting observations out of the graph: 1) Copper price is more volatile than IP in recent years (since 2000) as well as late 80s. 2) The predicative power of copper started to show up in early 90s; before that, copper was more like a coincident indicator and sometimes even lagging indicator. This, I suspect, may have something to do with China’s integration into the world economy since 90s. 3) Recently, the copper price started to turn the corner. Does this mean the world economy may soon turn the corner, too? Read on…

A counter argument could be: China has been strategically buying copper at very low price (see graph below), but the buying itself does not mean China is having an economic recovery. To link copper price to economic rebound, we need to see the real “green shoots” in the Chinese economy.

So where are the green shoots? Chinese government has been increasing money supply and loan growth sharply (see graph below) to counter the deflationary pressure and stimulate the economy. And the effect was quite effective. At least, China does not have the problem of banking not lending.

In export sector, there are also signs that Chinese economy have turned the corner (see the graph below).

Personally, to make the copper story more convincing, I’d like to see the data of copper inventory flow — then we can decipher how much copper purchase was pure strategic buying from China and how much was due to actual recovery.

To summarize, I am cautiously optimistic about China’s outlook.

China’s coming aging problem

Due to its unique population policies, China will face the aging problem quicker than most other developing countries. China’s National Bureau of Statistics (NBS) in 2004 shows that the proportion of the population aged 65 years and older was 8.58 percent (now is around 12%), passing the UN’s definition of ‘aging society’, where persons 65 years and over account for over 7 percent of the total population.

China’s fertility rate declined from 6 in 1957 to 2.3 in 1980 and then 1.7 since the 1990s. When China’s baby-boomer generation (born in 60-70s) retires, around 2030, China will face a severe problem of working labor shortage to support the elders. The current estimate is there may be only two working-age people for every senior citizen, compared with 13 to one now.

The graphs below show what the age structure of China looks like in 2005 and will be in 2050:

In 2005:

In 2050:

(click to enlarge; source: United Nations)

China needs to consider changing its one-child policy sooner rather than later. Other policies should also be implemented in parallel with the loosening of the current draconian one-child policy: build a sound social security and pension system so young workers won’t be burdened with supporting the whole family; gradually moving China from a labor-intensive economy to an innovation-led economy (i.e., more output per worker, but this will be much harder to achieve).

Read more about China’s aging problem on Bloomberg.