An Economist At China's State Council Sees A Crisis Coming

Li Zoujun, an economist at the Development Research Centre of the State Council, recently made a report, presumably at an internal meeting, which predicted that China could face an economic crisis in 2013.

The full report in Chinese can be read here. We are not going attempt to summarise the whole report as it is quite lengthy, except that for some of his rationale for his somewhat apocalyptic predictions. Majority of what he said does not seem very surprising. The only surprising thing about such a report is just that it is made by someone from the State Council who said it, not any Westerners or Western media who were allegedly talking down China.

The causes of this economic crisis are, first of all, a burst of real estate bubble and local government debts crisis.

The second is external, namely that hot money and capital inflow over the past few years fuelled the bubble within China (then he blames “foreigners who short China“). As capital might flow the other way when the economy slows, it will cause troubles for Chinese government in dealing with it.

The third is political: as this year is pretty much the final year for the current government’s term, its job in the remaining months would be to hope that everything is stable. But let’s say the economy get pass the leadership transition without any troubles, the next leadership will face two choices: either to sustain the bubble for now and create a bigger problem in 2015 /16, or let the bubble got bust. Of which, he endorses the second choice.

Read more: China’s difficult choice between stimulating the economy and do nothing

Finally, business cycle short-wave and long-wave troughs could meet very soon (whatever that means). He believes that a crisis should have occurred in 2008/09, yet the massive stimulus delayed that, and it is about time that it can no longer be delayed.

In the coming crisis, he believes some local governments, small and medium sized business and some banks will go bankrupt.

For those who are familiar with our view, these are not new. We have spent quite a lot of time focusing on local government debts, shadow banking mess and real estate bubbles. We have also said for many times now that capital outflow will prove to be very problematic for China. Much of the endgame he is predicting here has been mentioned here, and indeed some are already happening, such as defaults and credit crunch among SME caused by mutual guarantees scheme, while some local government debts are being rolled over to delay the day of reckoning. While we do not think at the present moment that any banks will go bankrupt despite a potential financial crisis, we see Chinese banks shares to suffer an RBS-type outcome.

The only surprise, as we said, is that this is someone within the State Council who said it. This adds to the evidence to our judgment that the massive stimulus in 2009 is widely viewed as a mistake within China, and some within the government’s policymaking bodies share that view, and we believe this is one of the reasons why the government is so far reluctant to provide any massive stimulus despite arguably very grim economic outlook.

Read more: China economy 2012 series

This article originally appeared here: An economist at China’s State Council sees economic crisis coming
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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