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China’s Economy. It’s All Good Until 2013. Maybe We All Can Get Along.

By Dan Harris on Posted in China Business

Just read an interesting post on one of my favorite blogs. The blog is China Solved, written by my friend Andrew Hupert. I have known Andrew since forever and I have always found him to be one of the most thoughtful and rational China anaylsyts out there. Andrew is an adjunct business professor at NYU in Shanghai.

Anyway, the post is entitled, Is Bad News Good Again? and it was written by Jeff Coggshall, who handles China investments for Tiburon Partners, a UK-based fund management company. The post is about signs of recent slowing in China’s growth. Now as regular readers of this blog know, I am not a fan of long term economic predictions and I am not going to discuss that here.

Instead, I am going to focus on what Coggshall calls the medium-term and on that, Coggshall says he has no worries:

I personally don’t spend much time worrying about China’s medium-term growth prospects – mainly because many of China’s growth constraints are self-imposed (i.e. property market restrictions and other tightening measures). These can easily be rolled back, and on a 1-3 year timeframe I find it very hard to envisage a scenario in which Chinese policymakers are either unable or unwilling to underline growth at a “reasonably fast” level of – say, 7 or 8%.

Coggshall’s lack of medium-term worry really struck me.

In one camp, we have the China’s economy can and never will do anything wrong crowd. See, e.g., Jim Rogers). In the other camp, we have the China’s economy (and everything else) is on the verge of crashing crowd  See e.g., Gordon Chang or Nouriel Roubini.

Then something struck me again.

Roubini has been calling for a China crash landing [free subscription may be required] to happen in or soon after 2013:

“China is rife with overinvestment in physical capital, infrastructure and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns and brand-new aluminium smelters kept closed to prevent global prices from plunging.”

“Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990s – have ended with a financial crisis and/or a long period of slow growth.”

So here’s what I am thinking. I think Cogshall is right that China has enough tools to be able to keep its economy going for at least a few more years. Heck, even Dr. Gloom himself, Nouriel Roubini, seems to agree with that. 

So is it pretty much a given that China’s economy will do fine until at least 2013? Does everyone agree we can relax until then? Can we all get along on this one China economy issue? What do you think?

  • http://www.shanghaiscrap.com Adam Minter

    Gordon Chang, Roubini and their like-minded brethren have begun to remind me of Rev Harold Camping, the purveyor of two incorrect prophecies about the end of the world. No matter how many times he gets it wrong (it’s the housing bubble! no, it’s the local government debt! no, it’s the leadership change! no, it …), somebody out there is going to accept his excuses and listen to the next prophecy. I guess the question is: what is it about China that draws analysts who appear to draw on the rhetorical tricks on the eschatology of American preachers?
    By the way, I’m not an abashed optimist on the CN economy, but I’ve really had enough of the ‘it’s all a ponzi scheme and it’s going to blow up school’ of analysis. Mid-2013 for a recession? Sounds reasonable, just please – Rev. Camping, I mean, Noelle Roubini – don’t tell me that China as we know it is about to disintegrate with it.

  • Bill Rich

    What if China decides not to get along ?

  • HI

    Predicting timing is hard. Could you predict when (as opposed to that) Enron would implode? China’s growth since 2008 has too many features of a Ponzi scheme. Sure, there’s an underlying legitimate economic structure there, just as Enron had legitimate businesses. But the legitimate part of the business didn’t justify the froth.

  • Twofish

    Roubini: All historical episodes of excessive investment – including East Asia in the 1990s – have ended with a financial crisis and/or a long period of slow growth.”
    Which is a meaningless and useless statement since if you have massive investment that doesn’t end with a financial crisis or a long period of slow growth, then it wasn’t excessive.

  • http://businomics.typepad.com Bill Conerly

    China has great long-term prospects, but I worry about the near term.
    1) nobody in the world is really good at avoiding the occasional recession
    2) the Chinese leaders know less economics than most
    therefore
    3) there is a significant risk of a Chinese recession.
    The specific concerns today are the government’s efforts to engineer slower growth, falling real estate prices, and a potential swing in attitudes within China.
    I would do some contingency planning for a possible downturn, though I’d expect any downturn to be brief.

  • dan berg

    so the optimists say “7 or 8% growth”; and inflation is now 5.3%; that means real growth of 1.7 to 2.7% ; add to this “optimistic” scenario a list of China’s financial, economic, social, environmental and demographic problems and ….. see where you come out.

  • dan berg
  • Twofish

    GDP growth rates are inflation-adjusted.

  • Richard

    I read another article that featured that Roubini quote (here: http://www.reuters.com/article/2011/06/13/us-roubini-idUSTRE75C1OF20110613). Another gem from Roubini:
    “I was recently in Shanghai and I took their high-speed train to Hangzhou,” he said, referring to the new Maglev line that has cut traveling time between the two cities to less than an hour from four hours previously.
    “The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is a also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou.”
    First of all, that’s a not a Maglev train. That project was scrapped (http://www.constructionweekonline.com/article-10839-shanghai-hangzhou-maglev-project-shelved/).
    Second of all, unless Shanghai just built a third airport since the last time I was there, that “new local airport” in Shanghai is Hongqiao, which a) obviously isn’t new and b) is pretty much always busy. Even after the expansion, there are still domestic flights going in and out of Pudong as well. I’ve never heard anyone argue that Hongqiao has too much capacity, but I guess if you think it’s a “new” airport, it might be possible to come to that conclusion.
    Third of all, the high-speed train may be half-empty (although surely that depends on what time of day you travel), but it’s built to have enough capacity for the medium to long term.
    Finally, why is it that every reporter/pundit/expert/guru feels the need to come to China and make broad, sweeping judgments about the soundness of the Chinese economy/political system/social order based on a single experience with infrastructure in a major urban area? That’s worse than gleaming deep sociopolitical insights from taxi drivers.
    Anyway, it’s a little hard to take Roubini seriously on China…

  • Aaron

    “All historical episodes of excessive investment – including East Asia in the 1990s – have ended with a financial crisis and/or a long period of slow growth.”
    Perhaps so, but as they say in the stock market, historical performance is not an accurate predictor of future performance, especially when applying the historical trends of one set of countries to another.
    Historically, China has also consistently defied predictions of all kinds. What does that say about China’s future.
    >
    Regarding Ponzi schemes, in some ways, all investments are like Ponzi Schemes. I mean seriously, what’s the value of stocks other than what holders buyers believe they to be?
    Currencies are just paper, Gold and precious metals are only valued to belief of demand and supply.
    All financial values are based upon Confidence of nations and people. And that’s the bottomline.
    There will be a crash, if the people do not believe that the profits they are making are real. (That’s the real cause of US recession).
    But look at China, the fact that the Chinese people, despite all the complaints of corruptions/etc., still are confident in their own economy and national future, AND do not believe in the likes of Gordan Chang and other doomsayers. That fact should tell you something.
    It’s not some irrational faith in a financial market run by institutions, corporations, and government. It’s their faith in themselves, in spite of their cynicism of the government and corporations. (The “can do” attitude that Thomas Friedman laments that Americans have lost.)

  • Vincent

    @ Richard: I think the link is dead, but I found the quote on http://blogs.wsj.com/chinarealtime/2011/06/14/nouriel-roubini-trouble-ahead-in-china-and-europe-and-the-u-s-and/
    And I think you forgot to mention the worst thing about the quote: There are no flights from Shanghai to Hangzhou! (Unless you want to fly via Wuhan or Fuzhou, which would not be very clever…) The correct substitute would have been the bus..
    I mean it is evident that China has some problems with overinvestment and high speed trains, but Roubini really chose the worst possible example for this.. Four huge factual mistakes in two sentences.. Really makes it hard to believe him on other China related issues

  • dan berg

    Twofish: you are right; my stupid mistake; thank you for the correction

  • Twofish

    Also part of the point of the HSR between Hangzhou and Shanghai is that it makes it possible to use the international airport in Hangzhou to get to Shanghai.

  • Ames Tiedeman

    “The United States of America has not had a trade surplus since 1975. We have not had a trade surplus with Japan since April, 1976. Every year since 1983 we have been in deficit with Europe. The last time America had a trade surplus with both Russia and China was a very brief period during the Cold War. We have been running ever increasing trade deficits with South Korea since 1998. Our 1993 trade surplus with Mexico is now a 100 billion a year trade deficit. In the 1970’s, 80’s, and much of the 1990’s our trade deficit was never more than one half of 1% of GDP. We now find ourselves with a trade deficit of between 5% and 7% of GDP depending on how you count. From 2002 to 2007 the trade deficit exploded. The only reason unemployment stayed well under 6% is because of the credit bubble. 63% of all jobs created from 2000 to 2006 were housing or credit bubble related. We did not feel the destructive affects of the trade deficit because of this credit bubble. I have concluded from work I have been doing that America will never get unemployment even under 7% with a trade deficit of over 3% of GDP, without a major credit bubble. The U.S. Economy has actually stopped functioning like a real economy. We literally need a credit bubble to function. America must move from the ideology of free trade to the economic policy of balanced trade. Until this structural shift takes place you can bank on the American economy being the laughing stock of the world economy.”
    -Ames F. Tiedeman