Prophet of doom squashes hopes of China’s recovery
Tom Holland 9 April 2009
Over the next week, China is due to release a raft of economic data for the first quarter of the year, but economic analysts are celebrating already.
The past few days have seen a rush of research reports all predicting an early recovery for the mainland economy. Yesterday, for example, investment bank Macquarie revised its 2009 forecasts, saying growth could now hit Beijing’s target rate of 8 per cent.
Meanwhile, Goldman Sachs proclaimed “China has already embarked on its path of a growth recovery”, while analysts at Morgan Stanley declared “We expect a V-shaped recovery over the course of 2009 for the Chinese economy.”
The reason for this change of heart is simple: as HSBC proclaimed last Friday “China’s stimulus package launched last November is working”.
Not everyone is so optimistic, however. Breaking into the general euphoria, a paper published on Tuesday by renowned economist Nouriel Roubini provided a sobering reminder of why all the forecasts of a vigorous Chinese rebound this year could be dangerously premature.
Over the past couple of years, Mr. Roubini, the founder of independent research house RGE Monitor, has earned himself the reputation of a prophet of economic doom. Most notably, his February 2008 paper “The 12 steps to financial disaster” proved uncannily prescient, successfully predicting the collapse of “one or two large and systemically important broker dealers” and the market carnage that would follow.
Mr. Roubini is clearly fond of lists. Now, fresh from attending last month’s China Development Forum alongside the mainland’s senior leadership, he has come up with another: a roll call of reasons to be pessimistic about the nation’s economy.
First, with external demand weak and little prospect of an early recovery in the developed world, China’s export sector will continue to suffer.
And because China’s exports are far larger than its imports, they are falling faster in absolute terms, meaning the trade surplus is set to shrink, reducing its contribution to overall growth.
Halting the yuan’s appreciation against the US dollar will not help. As the first chart below shows, the yuan is still climbing against an inflation-adjusted basket of currencies, eroding the competitiveness of China’s exports.
As a result, Mr. Roubini is gloomy about unemployment. In addition to the estimated 20 million migrant workers who have lost their jobs already, many of the six million college students graduating this summer are also likely to find themselves without work. With private sector employers hit hard and Beijing’s stimulus spending being channelled largely into capital-intensive rather than labour-intensive sectors of the economy, there is little prospect of any improvement soon.
Fears over job security, coupled with emerging deflation and the destruction of wealth resulting from the fall in stock and property prices will dampen consumer sentiment, slowing private consumption growth and weighing on the overall economic growth rate.
Nor will government efforts to boost consumption work in the near term. Measures such as health-care reform intended to reduce precautionary savings and increase spending will take years to have an effect. In the meantime, with the outlook poor, ordinary people are likely to save more, not less, of their income.
Attempts to reduce corporate savings rates also face problems. With governance weak and government departments at odds over how to divide the spoils, there is little chance that companies raise dividends any time soon.
Next, the decline in property prices, together with the steep fall in corporate profits will hammer private sector capital expenditure.
The government is attempting to compensate by encouraging banks to lend more, especially for infrastructure investment. But although bank loan growth has soared in recent months (see second chart), much of the money has simply been put back on deposit or into the stock market.
And the portion that has been channelled into the real economy has largely gone into sectors of the economy already suffering from overcapacity. As Mr. Roubini points out, investment returns on new projects have been falling for years. Pumping in yet more money will do nothing to raise productivity and so little to encourage growth.
As a result, Mr. Roubini is characteristically bearish on China’s economy. He is forecasting a hard landing with growth of just 5 per cent this year, whatever the optimists have to say about the growing chances of an early recovery.
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Prophet of doom squashes hopes of China’s recovery
Tom Holland
9 April 2009
Over the next week, China is due to release a raft of economic data for the first quarter of the year, but economic analysts are celebrating already.
The past few days have seen a rush of research reports all predicting an early recovery for the mainland economy. Yesterday, for example, investment bank Macquarie revised its 2009 forecasts, saying growth could now hit Beijing’s target rate of 8 per cent.
Meanwhile, Goldman Sachs proclaimed “China has already embarked on its path of a growth recovery”, while analysts at Morgan Stanley declared “We expect a V-shaped recovery over the course of 2009 for the Chinese economy.”
The reason for this change of heart is simple: as HSBC proclaimed last Friday “China’s stimulus package launched last November is working”.
Not everyone is so optimistic, however. Breaking into the general euphoria, a paper published on Tuesday by renowned economist Nouriel Roubini provided a sobering reminder of why all the forecasts of a vigorous Chinese rebound this year could be dangerously premature.
Over the past couple of years, Mr. Roubini, the founder of independent research house RGE Monitor, has earned himself the reputation of a prophet of economic doom. Most notably, his February 2008 paper “The 12 steps to financial disaster” proved uncannily prescient, successfully predicting the collapse of “one or two large and systemically important broker dealers” and the market carnage that would follow.
Mr. Roubini is clearly fond of lists. Now, fresh from attending last month’s China Development Forum alongside the mainland’s senior leadership, he has come up with another: a roll call of reasons to be pessimistic about the nation’s economy.
First, with external demand weak and little prospect of an early recovery in the developed world, China’s export sector will continue to suffer.
And because China’s exports are far larger than its imports, they are falling faster in absolute terms, meaning the trade surplus is set to shrink, reducing its contribution to overall growth.
Halting the yuan’s appreciation against the US dollar will not help. As the first chart below shows, the yuan is still climbing against an inflation-adjusted basket of currencies, eroding the competitiveness of China’s exports.
As a result, Mr. Roubini is gloomy about unemployment. In addition to the estimated 20 million migrant workers who have lost their jobs already, many of the six million college students graduating this summer are also likely to find themselves without work. With private sector employers hit hard and Beijing’s stimulus spending being channelled largely into capital-intensive rather than labour-intensive sectors of the economy, there is little prospect of any improvement soon.
Fears over job security, coupled with emerging deflation and the destruction of wealth resulting from the fall in stock and property prices will dampen consumer sentiment, slowing private consumption growth and weighing on the overall economic growth rate.
Nor will government efforts to boost consumption work in the near term. Measures such as health-care reform intended to reduce precautionary savings and increase spending will take years to have an effect. In the meantime, with the outlook poor, ordinary people are likely to save more, not less, of their income.
Attempts to reduce corporate savings rates also face problems. With governance weak and government departments at odds over how to divide the spoils, there is little chance that companies raise dividends any time soon.
Next, the decline in property prices, together with the steep fall in corporate profits will hammer private sector capital expenditure.
The government is attempting to compensate by encouraging banks to lend more, especially for infrastructure investment. But although bank loan growth has soared in recent months (see second chart), much of the money has simply been put back on deposit or into the stock market.
And the portion that has been channelled into the real economy has largely gone into sectors of the economy already suffering from overcapacity. As Mr. Roubini points out, investment returns on new projects have been falling for years. Pumping in yet more money will do nothing to raise productivity and so little to encourage growth.
As a result, Mr. Roubini is characteristically bearish on China’s economy. He is forecasting a hard landing with growth of just 5 per cent this year, whatever the optimists have to say about the growing chances of an early recovery.
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