A recent visit to China generated several counter-intuitive conclusions.
First, the post-financial crisis lens may be the wrong prism through which to view China. Second, pollution and the anti-corruption campaign are greater and less quantifiable risks than a property or debt bust. Third, China’s 2009 stimulus programme is viewed internally as a big strategic mistake, one unlikely to be repeated. Last, China will not lift the west, nor can the west lift China – the world is defaulting to an economic landscape where it is every country for itself.
Starting at the top, a post-financial crisis search for China debt catalysts makes perfect sense given its recent credit expansion and consequent overbuilding. A residential property bubble does exist – in fact, declining transaction volumes and price reductions suggest it is already deflating. Yet this is a problem policy makers are well aware of and for which multiple tools exist to mitigate the threat of a crash.
A property crash would be socially explosive given that it often takes three to four individual pools of savings to meet the 30 per cent deposit requirement. There is every reason to expect the authorities to act with vigour here.
Second, pollution and the anti-corruption campaign bookend China’s economic policy flexibility. Beijing’s pollution is well known but every mile of the 800-mile bullet train trip to Shanghai provided visible evidence of a much greater concern.
Pollution encapsulates today’s China; it is a known and highly visible problem that has yet to be fixed. Of course, attacking the problem means shutting down factories and throwing people out of work, which is difficult to do in a downturn. That a solution to one problem begets another problem is symptomatic of China today. An environmental disaster causing a loss of faith in the leadership presents a significant risk.
The anti-corruption campaign is unprecedented in its scope and implication for the economy and society at large. Political patronage networks that extend the length and breadth of China are being rolled up, leaving great uncertainty in their wake. The campaign seems quite popular on the street but in the boardroom it elicits fear and uncertainty, neither of which is pro-growth. This campaign represents a virtually unquantifiable risk across many fronts, especially with regard to the state-owned enterprise reform process.
All these issues emanate from the vast 2009 stimulus programme. Widely and erroneously seen in the west as a sign of Chinese macroeconomic flexibility and management skill, it is viewed quite differently in China.
This period is seen (in hindsight) as the perfect time for China to have begun its reform project with a ready-made scapegoat, the US financial crisis, at hand. In contrast, any mistakes that emanate from today’s reform process will be laid at the feet of current leadership – a reality that is itself a significant brake on the speed and magnitude of reform.
The stimulus programme resulted in huge misallocations of capital that will trouble China for years as projects come on stream to a much weaker demand profile. Credit crunch risk is apparent; capital efficiency is a big challenge.
The 2009 programme’s legacy is such that even if President Xi Jinping and Premier Li Keqiang wanted to execute such a huge stimulus it would simply lump them in with their predecessors, and no politician wants to be seen doing what has already been done. A repeat is highly unlikely.
As if dealing with the 2009 programme fallout is not enough, China’s leaders are juggling at least five other big economic issues. These include: capital account opening, interest rate liberalisation, state-owned enterprise reform, job creation, and social issues. None of these are likely to move quickly; traders can stop watching every twitch of the renminbi rate, for example.
What does all this mean for investors?
Externally, a slowing China represents a wet blanket that will damp the world’s growth and inflation outlook for years to come. This in turn will put more pressure on the European Central Bank and Bank of Japan to act; the US Federal Reserve and China both pulling back on liquidity presents a global growth challenge.
Internally, China will not boom again but nor is it likely to bust; an unbalanced economy and under-developed financial markets limit domestic investment opportunities. Neighbours can expect a rising tide of Chinese capital while the welcome mat is put out for foreign capital. China will not be the catalyst that alters the current low volatility asset landscape. Reform and rebalancing will be conducted Chinese style: crossing the river by feeling the stones.
Jay Pelosky is principal of J2Z Advisory
对于外部世界，中国经济增长放缓就好像是一盆扫兴的冷水，将阻抑未来多年的全球经济增长和物价上涨前景。而这将使欧洲央行(European Central Bank)和日本央行(Bank of Japan)承受更大的压力，迫使它们采取行动；美联储(US Federal Reserve)和中国方面同时回收流动性将使全球经济增长面临挑战。
注：杰?佩罗斯基(Jay Pelosky)是J2Z Advisory的创始人及首席顾问。
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