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45pc of global players expect bubble to burst within five years
David J. Lynch
30 January 2011
Global investors are bracing for the end of China’s relentless economic growth, with 45 per cent saying they expect a financial crisis within five years.
An additional 40 per cent anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7 per cent are confident China will indefinitely escape turmoil.
“There is no doubt that China is in the midst of a speculative credit-driven bubble that cannot be sustained,” says Stanislav Panis, a currency strategist at TRIM Broker. Panis likens the expected fallout to the aftermath of the US subprime-mortgage meltdown.
Investors’ concerns over China contrasts with government statements on the outlook for the economy. The Politburo said last month that the nation had a “sound base” for stable and fast growth in 2011 after consolidating its recovery.
Fifty-three per cent of poll respondents say they believe China is a bubble, while 42 per cent disagree. China’s neighbours are the most concerned: 60 per cent of Asia-based respondents see a bubble in the world’s No 2 economy.
Worries centre on the danger that investment, which surged almost 24 per cent in 2010, may be producing empty apartment blocks and unneeded factories.
Jonathan Sadowsky, chief investment officer at Vaca Creek Asset Management in San Francisco, says he is “exceptionally worried” that China will eventually face “major dislocations within their banking system”.
The authorities raised interest rates twice in the fourth quarter in a bid to choke off inflation, a sensitive political issue. Food prices last year rose 7.2 per cent, according to the National Bureau of statistics.
Haroon Shaikh, an investment manager with GAM London, cited “rapid wage inflation” and soaring property prices as the financial markets’ chief concern.
Li Daokui, an adviser to the central bank, said rising real estate prices are the “biggest danger” to the economy. The People’s Bank of China should “gradually increase rates in the first and second quarter”, Li said.
Since peaking in November at 3159.51, the Shanghai Composite Index has slid about 14 per cent. “The market is right to be nervous,” Michael Pettis, a finance professor at Peking University’s Guanghua School of Management, wrote in his recent financial newsletter.
But some investors remain unbowed. “China can continue to grow over 10 per cent for the better part of the next five years,” said Ardavan Mobasheri, head of AIG Global Economics in New York.
Still, the poll found other signs of mounting investor caution towards China. Asked to identify the worst market for investment over the next year, 20 per cent of poll respondents say China versus 11 per cent in the last poll in November. Almost half of those polled - 48 per cent - say a significant slowdown was very or fairly likely within the next two years.
Michael Martin, senior vice-president of MDAvantage Insurance Company of New Jersey, says the central government “has executed brilliantly” in managing the economy. The government’s capacity will be tested as the economy grows and becomes more complex, he says.
Officials have said they intend to wean the economy off its reliance upon exports in favour of greater domestic consumption.
Most respondents remained confident of the government’s ability to fend off demands for greater political liberalisation. Just 1 per cent expect a political crisis within the next year and 27 per cent expect one within the next two to five years.
And by a 60 per cent to 30 per cent margin, those surveyed say President Hu Jintao’s policies were favourable to investors.
“Chinese politicians are able to act on all necessary issues. That gives them a huge advantage compared to Western economies,” says Henry Littig, who heads his own global investment firm in Cologne, Germany.