Economists were encouraged by the latest data out of China, which seem to suggest that the worst is over and the economy has bottomed for now, but the three market gurus said the world’s second-largest economy still faces challenges.
China’s gross domestic product growth eased slightly to 7.4% in the third quarter from 7.6% in the second quarter but various other data for September were stronger than forecast, prompting analysts to say a hard landing may be avoided.
But Marc Faber, the bearish investor and author of The Doom, Gloom and Boom Report forecast “a harder landing than expected” before the third-quarter GDP data was released.
“I think at the present China is growing at maximum 4%,” Faber told Emerging Markets last week, during the IMF/World Bank annual meetings.
Faber’s arguments are the slowdown in credit, “lots of overcapacity,” high inventories and “an underground lending business” that caused lots of problems by inflating a property bubble. He looks at exports from South Korea and Taiwan to China and at electricity production to gauge the health of the economy, not at the official growth figures.
However, he said that the situation in China will be resolved eventually as the country is dealing with “a credit bubble that has created a maladjustment in the economy.” “We have a property bubble but urbanization in Asia will continue and these properties will be sold eventually,” Faber said.
GROWTH OF JUST 3%?
Another economist who is bearish on China for the long term is Harvard professor Kenneth Rogoff, who told Emerging Markets that a rate of growth of just 3% for China was possible.
“It’s a pretty low probability in the near term, but if you’re going over five years, it’s a distinct possibility,” Rogoff said in an interview last week. “It’s very hard to deleverage an economy that’s growing in the way China does it, despite very thoughtful efforts by Chinese officials; there are still tremendous pressures to produce fast growth – and to take risks.”
China’s Communist Party leaders meet on November 8 at the 18th Congress to decide on a once-in-a-decade leadership change and to discuss the future of the economy.
The problem, according to Rogoff, is that “growth through heavy investment just stops to work after a while. That’s what we saw in Latin America in the 1960s when things just started slowing down.”
China has had a “very heavily investment-oriented growth strategy,” much like Japan did or even, at some point, the Soviet Union, he said.
“But you eventually hit diminishing returns, though it’s hard to know when that is,” Rogoff said. “Then countries start to seek out other ways to get fast growth, financial liberalisation being a leading one, which in theory is a very good idea but when you start doing it in too rushed or panicked a way, it’s risky. That’s classic political economy.”
NO MONETARY EASING
“I don’t know how it will unfold in China,” Rogoff added. “They’re clearly very cautious. These things aren’t easy to calibrate. When you do monetary tightening in China, given their very controlled, repressed financial markets, it’s not necessarily easy to do tightening in a calibrated way; advanced countries certainly don’t find it easy.”
Analysts said that China’s better-than-expected industrial output, retail sales and household consumption data dashed hopes of further stimulus or monetary easing by the People’s Bank of China (PBOC), whose deputy governor expressed worries about the consequences of quantitative easing in developed markets on inflation in China during the IMF meeting in Tokyo last week.
Jim Rogers, co-founder with George Soros of the Quantum Fund in the 1970s and a long-time China bull, said the PBOC was right not to stimulate the economy further.
“China is doing the right thing; they try to cool inflation and a property bubble. If I were China, I’d tighten some more,” Rogers said in an interview with Emerging Markets last week.
The construction boom is likely to continue, even though not at the same pace, as the country needs infrastructure and the shrinking of the GDP is unlikely to be as dramatic as many people say, according to Rogers, who sees China’s slowdown as temporary.
“No system exists where everything always goes up,” he said.