Monday, 25 January 2010

Expectations of China growth a dangerous complacency

That loud hissing noise you hear is coming from Dubai, where reality is catching up with an economy built on sand - literally and figuratively.

2 comments:

Guanyu said...

Expectations of China growth a dangerous complacency

By WILLIAM PESEK JR
08 December 2009

That loud hissing noise you hear is coming from Dubai, where reality is catching up with an economy built on sand - literally and figuratively.

Just don’t let it drown out another one that’s slowly, but steadily increasing in volume: China.

The reference is to an imbalance of global significance: not the bubble in Chinese asset prices, which the world obsessed about this year, but the belief that the world’s third-largest economy can grow close to 10 per cent indefinitely, no matter what.

That’s feeding a dangerous sense of complacency in Asia.

The focus has been on China’s stimulus efforts and low interest rates adding froth to stock and real-estate markets. The real bubble is the expectations that China is creating - ones that will be devilishly hard to meet next year.

China’s plan was to tide the economy over until US consumers begin spending again. Yet a stark reality awaits central planners in Beijing: the global demand that its all-important export markets need to thrive won’t turn up as planned.

Here, think more Bill Gross than Nouriel Roubini. Mr. Gross, who runs the world’s biggest bond fund at Pacific Investment Management, has been doing the media rounds warning about the absence of demand from China’s trading partners.

‘It’s gearing up for export that doesn’t find an end consumer - that’s the real problem in China,’ Mr. Gross told Bloomberg Television recently.

The China bubble of which New York University Professor Roubini speaks has more to do with easy money in Beijing, Tokyo and Washington. His worry is about ‘money chasing commodities’ such as gold, which is trading above US$1,200 per ounce, and, of course, Chinese assets.

Mr. Gross isn’t ignoring this market exuberance. He says that China ‘may abandon its (US) dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland’.

The bust in Dubai is another sign that the global credit crisis is far from over. Anyone who said even one year ago that Dubai’s designs on regional economic supremacy were too grand or that it was over-leveraged was shouted down as a village idiot. The place was said to be unstoppable. Well, Dubai World’s debt troubles put an end to that silliness.

Let that be a wake-up call for China. It too must clamp down on speculation-driven property markets. All too often, officials in Beijing see rising real-estate values as a prerequisite for rapid growth. It’s a worrisome mindset.

Yet it’s the expectations bubble that may prove more damaging. In Hanoi last week, officials I met seemed convinced that Chinese growth would save the day. For all the worries about the undervalued yuan hurting Vietnam’s exports, there’s confidence that strong growth in a US$4.3 trillion economy will buoy Asia.

Asia’s growth is feeding complacency. Take South Korea’s Min Euoo Sung, who laments KDB Financial Group Inc’s failed effort to buy Lehman Brothers Holdings Inc in September last year.

‘We missed a very good opportunity,’ Mr. Min told Bloomberg News on Nov 16. ‘I think we could have avoided a situation where Lehman collapsed so rapidly.’

Yeah, sure - and taken South Korea down with you. Mr. Min’s comments smack of a hubris Asia can’t afford. South Korea is doing well today, and can take pride in proving wrong those who said that it might become the next Iceland.

Some perspective is in order, though. Asia has indeed fared better than the US and Europe. That’s no reason to declare victory and move on.

The region still needs to rebalance its growth model, deepen financial markets, improve the quality of government and cooperate more.

Guanyu said...

Mr. Min’s if-only-we’d-grabbed-Lehman musings are highly unwelcome. KDB is state-owned and Mr. Min was publicly scolded by lawmakers for even attempting the deal. Lehman’s radioactive portfolio would’ve dented confidence in South Korea at the worst possible time. Free-market folks abhor governments interfering in business. In this case, South Korea’s leaders served their people well.

Asia’s confidence reflects its status as the only region still growing solidly. It also avoided the excesses that did in the US financial system - not to mention the global one.

Last Friday, a senior Chinese official, Li Wei, condemned Western investment banks for ‘fraudulent practices’ that partly caused more than 11.4 billion yuan (S$2.32 billion) of derivatives losses at state-owned companies last year. Expect more such charges from Asia.

Just because Asia deserves a pat on the back doesn’t mean that next year will be an easy year. And that speaks to Mr. Gross’s point. The stimulus efforts rolled out in China and the rest of Asia are keeping growth aloft. The sustainability of that growth is becoming less certain with major economies limping along.

Friday’s news that US employers last month cut the fewest jobs since the recession began, and that the unemployment rate fell, offered a ray of hope. It hardly means that the kind of robust US recovery that Asia needs is afoot.

Just as Dubai suddenly finds the ground below its economy shifting, Asia’s export-driven economies may lose their footing amid shaky global demand.

The writer is a Bloomberg News columnist. The opinions expressed are his own