Photo: Feng Li/ Getty Images
Depending on who you ask, China is heading for either a hard landing or a soft landing.Some see a property bubble bursting, while others think the prices are declining because the government wants them to.
At the Bloomberg Link China Conference, we heard the bull and bear case for the world’s second largest economy.
Francisco Blanch, head of global commodity research, Bank of America Merrill Lynch said he was sceptical of state capitalism and expected China to lose its competitiveness quickly:
“If you look at the patterns of South Korean economy growth or Japanese economy growth, over the last 30 – 40 years, going farther to the post WWII period, you find that periods of very fast growth were followed by periods of substantially lower growth. That’s something that will get to China too.
We can’t kid ourselves thinking that a $7.5 trillion economy can continue to grow at a rate of eight to 10 per cent. I think the maths won’t add up because simply there are not enough resources out there whether it is oil or other resources in the world economy to make that transition happen, simply there are not enough productivity gains to be realised, to keep growth rates on a 10 per cent run-rate for 10 years plus.
Now that doesn’t mean we slow down to say 6 or 7 per cent over the next five years (or) 10 years. But remember the rate of convergence between the US and the Chinese economy is so fast, and the dramatic change in the current account that has happened in the past five years has been so pronounced, that the Chinese economy is going to lose its competitiveness, quite quickly. In fact it’s already happening with wages running very strongly, with China being highly exposed to energy prices. The U.S. economy is going just the other way.”
Stephen Leeb, chairman and CIO, Leeb Capital Management was the one evident China bull. Leeb said he wasn’t concerned about China and pointed out that in 2011, which was a “crummy year for the world” China was growing at 9.2 per cent. According to Leeb, China addressed issues around its property bubble and is working on programs to boost consumer growth. He argued that the period of China’s slowdown would be sometime between 2020 – 2025, and that its next 10 years would be among the most intense in the history of any industrial economy.
“What we realise here, China realises too. I think this is one of the reasons, this is kind of speculative, that China right now has become the world’s largest buyer of gold, by far. They have a lot of control. They have a lot of options. We talk about inflation, I mean one cure for inflation in China, and especially it’s a dual win, let their currency appreciate. I think some estimates are it should be 3-1, but I think they’ll do that fairly gradually, because they want to do it without disturbing things, but they have these options.
I mean China basically is not a country that is necessarily just going to sit still. I mean they’re a country that in the late 90s, when oil was sitting at about $9 – $10 a barrel, they decided oil was a major strategic part of their growth and formed a company called Petrochina, which in about 10 or 12 years surpassed surpassed Exxon, it has gone down since then in terms of market cap.
They sort of get it, and they don’t get it on a quarter-to-quarter or year-to-year basis, they’re thinking 10 years ahead. And 10 years from now I think the Chinese government would like to see the yuan valued at about 3:1 and they would like to see it at least partially backed by gold, which would give them tremendous control. And they would like to see I think a deficit, a major deficit just like we have in the United States. In other words what I’m arguing is I think the Chinese really do want this. They want the yuan to be a major part of a currency basket that represents reserve currencies. They want oil priced in yuan, not dollars. And I think they are coming closer and closer to that goal.”
Unlike Leeb, James Sweeney, managing director of Credit Suisse’s global strategy team, writes off a lot of China’s problems to its policies:
“…I think what’s happening over time is the Chinese economy is accumulating some risks as a result of its foreign exchange and its general policy regime. I think you can’t just assume that a monetary policy and a policy engine run the way China’s is, will not lead to the kind of monetary and credit bubble problems which have plagued basically all economies which have grown fast over the past 200 years.
I think they are smart in government, I think they’re managing short-term risks well, but I worry that the accumulation of longer term risks via pretty big bank credit expansions, via an exchange rate which doesn’t seem to be in the sort of equilibrium that you’d expect, and an inflation rate which is elevated compared to their trading partners.”
There is no real consensus on China but everyone will be watching the Asian giant, as the global economy continues to flounder, and it sees a transition of power to the fifth generation leadership later this year.