The bearish call is growing louder and louder on China. Regardless of all the potential growth hidden in the Chinese economy, what is of concern is the method in which growth has been created to date.
Roubini points out that fixed investment in China is now around 50% of GDP. He says, “Down the line, you are going to have two problems: a massive non-performing loan problem in the banking system and a massive amount of overcapacity are going to lead to a hard landing.” This sounds quite familiar. Consumer spending as a % of GDP continues to shrink in China given the rapid growth in fixed capital investments. When the global economy falters, or the property bubble bursts in China, a hard landing will be unavoidable. I do not see how the economy will have a solid domestic foundation established in time!
At an Oslo conference, Soros commented that he thinks China is setting itself up for a “hard landing,” as the authorities are “losing control.” He said, “China’s formula for steering its economy is “running out of steam,” adding the country is seeing the beginnings of wage-price inflation.” Personally, I never thought China would be able to control inflation. I felt the pace of real tightening would end up being far too slow to hold down prices after the massive $586bn (15% of GDP) pump-priming package was released in 2008.
We all know Chanos’ view on China. Chanos said in May “I am not bearish enough on China.” A comment in his Bloomberg interview that stood out was “…If you look at the balance sheets of the developers, you’d be hard-pressed to see how healthy they were because they are all loaded up with land, just as our developers were at the top of our market… They are drinking the Kool-Aid, so to speak.” Pushing the country to meet growth goals by hastily constructing high rises and apartments; building resorts and shopping malls that look like ghost towns; and laying out roads and bridges to nowhere will certainly create a mountain of NPLs that will break the banks.
Back in December, George Magnus, of UBS, was interviewed by Fortune Magazine and discussed his new book “Uprising.” He commented, “There will be issues like inflation that will test the leadership there on their willingness to change. I am not holding my breath for any big gestures or radical economic changes.” It’s a book worth reading. Consumer price inflation is closing in on 6% in China. If the country wants wage growth to continue in the double digits without inflation being an issue, it’s impossible.
Overall, investors and economists are concerned China’s future may not be as bright as it’s made out to be. I agree. It’s a matter of time. Whether one predicts the crash to come in 2012, 2013, 2014 or beyond, a negative catalyst is required. Will it be the power shift in 2012, rapid inflation or a global crisis? No one knows for certain. What we do agree on is a hard landing is increasingly likely, and not the other way around.
Quotes taken from the follow readings:
- Soros Says China Missed Window to Stem Inflation, Now Risks ‘Hard Landing’ - Bloomberg (Jun 14, 2011)
- Roubini Says ‘Perfect Storm’ May Threaten Global Economy – Bloomberg (Jun 13, 2011)
- CHANOS: I AM NOT BEARISH ENOUGH ABOUT CHINA – Pragmatic Capitalism (May 24, 2011)
- China Will Face Crisis Within 5 Years, Investors Say – Bloomberg (Jan 26, 2011)
- Four questions with China skeptic George Magnus – Fortune (Dec 3, 2010)
