China doomsayer sees crash coming
China’s consumption boom is drawing to a close, according to
one economist’s contrarian view, which calls for no growth — or even a
contraction — in the Chinese economy and the advent of an era of deflation and
weaker spending.
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By Chris Oliver, MarketWatch
09 April 2012
China’s consumption boom is drawing to a close, according to one economist’s contrarian view, which calls for no growth — or even a contraction — in the Chinese economy and the advent of an era of deflation and weaker spending.
Investments leveraged to the rise of the Chinese consumer, ranging from Australian miners to luxury-handbag makers and even iPhones are due for a reality check, according to Jim Walker, founder and managing director of the Hong Kong-based economic research company Asianomics.
While much of the analyst community has touted China’s growing domestic demand in recent years, Walker sees the Chinese consumer as unlikely to show much resilience, now that the economy is on a weakening trend and easy credit has run its course.
Jim Walker, founder and managing director of the Hong Kong-based economic research firm Asianomics.
“The contrarian call we have is to short or underweight consumer plays until we get through this,” said Walker.
Walker ranked as the most pessimistic of 19 major global investment managers and brokers which MarketWatch surveyed last month for their views on China’s economic outlook. See report on MarketWatch’s China survey.
Walker, a former chief economist with brokerage CLSA, was among the minority of economists surveyed that forecast a hard landing for China within the next three years.
In his view, China’s gross domestic product growth will slow to 4% year-on-year, while the real rate of growth will appear almost flat when adjusted for inflation — and he doesn’t rule out a more serious downturn, either.
“I don’t think a contraction [in GDP] is out of the question by any means,” Walker said.
Meltdown in stages
Some pockets of the Chinese economy will take time to feel the full scale of the downturn, but the broader economy has already begun to stall, he said, with official data likely to show signs of sharp deterioration over the next six months.
He puts cement companies and real-estate developers in the category that will appear somewhat resilient before a deeper downturn takes hold, with the temporary reprieve supported by earlier pre-sales of housing projects.
Ultimately, however, many companies is those industries will collapse and eventually undergo consolidation, Walker said.
“Property-led growth and infrastructure-led growth is just about finished,” he said.
Changes are afoot at the N.Y. Federal Reserve. Also, how important is Friday’s jobs report to the markets? Photo: AP.
Walker, who adheres to the controversial Austrian school of economics, said that what’s unfolding is part of the normal business cycle, in which activity contracts and investments have to be written off.
He believes that China’s low interest rates have helped stoke mal-investment on a scale never seen before, and that another government stimulus package appears unlikely, given a glut of overbuilding, including transportation projects such as airports.
“It was easy last time, because they just built property and infrastructure,” Walker said, referring to Beijing’s huge credit injection to held shield the economy from the global crisis in 2008.
“But this time around, there is too much in the way of misallocated capital embedded in the system to allow them to fund new project areas easily,” he said.
Watching corporates, trading partners
Walker says he’ll be watching for analyst earnings forecasts for further clues to the scale of the slowdown underway.
Those that track China’s larger companies were overly optimistic when it came to forecasting fourth-quarter earnings results, even though they had data from the prior quarters to work from.
“That tells you there is a lot more wrong and more softness in the China economy than people are willing to admit,” he said.
Other clues to the slowing trend could come in form of data on car sales or steel production.
Likewise, markets that are proxies for Chinese growth — including regional Asian trading partners South Korea and Taiwan and commodity-focused markets such as Brazil and Australia — should be avoided.
Walker however was more upbeat on China’s largest companies, saying many of those listed in Hong Kong were at levels that suggested fears of a slowdown were “quite a bit in the stock price already.”
He named state-controlled companies PetroChina Co. and China Mobile Ltd. as two that appear to be at reasonable valuations.
Not-so-perfect record
Walker is also sceptical of China’s apparently perfect streak of uninterrupted economic growth, which data show has averaged more 9% annually since reforms of the 1970s.
He said the non-stop growth might be a result of patching over official statistics to remove evidence of prior downturns, and he believes a recession did in fact take hold in the early 1990s, wrecking havoc on the Chinese banking system.
Data later showed that by the middle of that decade, Chinese banks were laden with non-performing assets equivalent to around of 25% to 40% of their balance sheets, levels that were much worse than anything seen in the U.K. or the U.S. during the Great Depression, Walker said.
“It will come as a surprise to people who don’t believe that the Chinese economy can have a cycle,” Walker said, referring to what he sees as a deflationary fallout that lies ahead.
While Walker’s outlook on China is firmly in the minority, it’s also shared by some fund managers, including Hugh Hendry of Eclectica Asset Management.
Hendry told Barron’s in February he believes China is headed for a hard landing and that he is making complex credit-related investments in Japan based on that outcome.
Among reasons for his negative views on China, Hendry cited concerns about investment flows directed by the public sector, and funded at the expense of savers, which don’t heed principles of profit-maximization