Eight months ago I warned that the China slowdown would be much worse than expected.\u00a0 I suggested the Wall Street parlor game of China economists\u00a0daintily trimming their GDP growth estimates from 7.5% to 7.3%, etc. was fairly ridiculous because the figures were fictitious.\u00a0 Today on Bloomberg Radio, this view was supported by Leland Miller of China Beige Book, whose firm regularly surveys 2000 China business.<\/p>\n
Since our last post, the incremental news on China has been worse than many observers expected.\u00a0 I expect that to continue to be the case.\u00a0 Some Wall Street firms\u00a0forecast a rebound in GDP next year, but I think that is very unlikely.\u00a0 It is extremely difficult to reposition an economy from being driven by exports and government-sponsored investment to being driven by private consumption and private investment.\u00a0 Japan tried\u00a0to do it in the 1990s, without success.<\/p>\n
What I wrote Eight Months Ago (Which Still Looks Right to Me)<\/strong><\/p>\n I know almost nothing about China, except what I read in The Financial Times<\/b>.\u00a0 But what I read is pretty scary; if you apply a little logic it is reasonable to conclude China growth will be much worse than current consensus. Yesterday in an FT column, \u201cwise man\u201d Gavyn Davies made these salient points:<\/p>\n It gets worse.\u00a0 The latest figures on exports and imports were much weaker than expected, which is not surprising because all of China\u2019s major markets are growing slowly, if at all.\u00a0 The FT <\/b>quotes a \u201cspokesman for the customs administration\u201d as saying, \u201cOur country is facing serious challenges.\u201d<\/p>\n So, to summarize, the two major drivers of China\u2019s growth, exports and investment, are slowing sharply.\u00a0 A credit bubble is being popped.\u00a0 And much of the credit growth of the past few years funded government projects which, by definition, were made at least partly for political not economic reasons.<\/p>\n Even if the government has the capital needed to prevent a \u201cChina Syndrome\u201d meltdown, we can expect Wall Street economists to keep ratcheting down their forecasts\u2014a lot.\u00a0 For the past couple of years the major Wall Street houses have been playing a dainty parlor game of cutting their China GDP growth forecasts 10 or 20 bps at a time\u20147.5%, 7.4%, 7.2%.\u00a0 My guess is that, before they are done cutting, they will be debating whether growth is above or below 5%.\u00a0 Even competent, well-managed governments of giant, sprawling nations that are simultaneously grappling with a credit bubble, overinvestment by governments, and a sharp slowdown in exports should not be expected to engineer an oh-so-soft landing in GDP growth.<\/p>\n March 2014 Post Script<\/strong><\/p>\n The recent export figures and PMI data have been very weak, which is not too surprising because most export markets have been soft.\u00a0 The Ukraine crisis won’t help.\u00a0 Real estate prices are rising more slowly.\u00a0 The government has said it will permit some bond defaults, which won’t be great for investor confidence.\u00a0 Obviously it is not easy to shift the economy toward consumptions when consumers are seeing real estate values soften.<\/p>\n I continue to be impressed by the opacity of the China situation.\u00a0 Just how bad are the loans made in the “shadow banking system?”\u00a0 In my experience, when credit bubbles unwind the news is always worse than expected.\u00a0 I am reminded of a Citi executive who said after the last crisis is,\u00a0 “After you get an estimate of the haircut in asset values, the first thing you do is increase it 50%.”<\/p>\n Copyright 2014 Thomas Doerflinger.\u00a0 All Rights\u00a0 Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":" Eight months ago I warned that the China slowdown would be much worse than expected.\u00a0 I suggested the Wall Street parlor game of China economists\u00a0daintily trimming their GDP growth estimates from 7.5% to 7.3%, etc. was fairly ridiculous because the … Continue reading \n