If the guy who called the top in the Japanese economy is right, then China faces a hard landing


The National People’s Congress kicks off in China on Thursday. One very large topic will be whether the official target for economic growth will be lowered to 7% from the current 7.5%.

Traders and central bankers all over the world will be hanging on the decision, because it will inform the amount of stimulus (rate and RRR cuts) likely over the year ahead as the PBOC manages the growth rate.

However, it’s all a moot point according to Roy Smith, the former Goldman Sachs partner who called time on the Japanese growth and property boom before anyone else back in 1990.

Smith told Bloomberg that “The vulnerabilities in China today are very similar to the vulnerabilities in Japan. Nobody agrees with me. But they didn’t agree with me in 1990, so at least I have one right.”

Shanghai Composite at 6-year highs (investing.com)

Smith sees parallels between China and Japan in the levels of bad loans, an overpriced stock market and “frothy” property markets. This leads to an overall fragility in the Chinese financial system, conditions Smith saw in Japan before the fall.

Key to Smith’s outlook and the timing of any potential drop is that he doesn’t see China eclipsing the US in terms of economic might.

“Most people today are talking about China displacing the United States as the great power of the 21st century. My view is that it is more likely to end up like Japan – that is, the status of a former would-be superpower that isn’t.”

Already the PBOC has cut rates twice in the past 4 months and looks like it has joined the currency wars as it tries to arrest faltering growth.

If Smith is correct then a day of reckoning is at hand for China. This means that rather than the steady glide path of downward-managed economic growth, China would be in for a hard landing.

The when and where is difficult to tell but Smith has some advice for those still enamoured with the Chinese economy.

They say a rising tide lifts all boats – a falling tide reveals all the rocks and slime.

We’ve all been warned.

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