Economic Crisis in China
Policy makers around the world have long envied China’s ability to get big things done. A huge 4 trillion-yuan ($630 billion) stimulus plan as the global economy cratered in 2008? No problem. Marshaling banks to lend trillions more? Check. Enacting sweeping regulatory changes at a moment’s notice? You bet.
Ahhh, the good old days. Now, a once-in-a-decade leadership shift is getting in the way of the stimulus-happy policies to which investors became accustomed. The nimbleness that helped China steer around the worst of the global crisis is confronting political paralysis of the kind more often seen in Japan, Europe and the U.S. The upshot is that China’s 7.6 percent growth rate may fall more in the next 12 months than anyone expects.
It’s not that Wen Jiabao doesn’t get the extent to which the supposedly unstoppable China has hit a wall. Just as in 2009, the premier is visiting key industrial cities such as Guangdong and Zhejiang. Wen is facing dour looks from manufacturers surrounded by mounting piles of unsold goods, a rare experience for the main engine of China’s economic rise.
Factory warehouses are cluttered with excess stock, store shelves are filled beyond capacity, and dealerships are choked with cars that used to speed from showroom to road. And yet Wen’s team in Beijing has been eerily silent about how it plans to revive things. That may be because the short answer is, it doesn’t.
Obvious Ways
One problem is that China has run out of obvious ways to kick-start its $7.3 trillion economy. It was easy in 2008: Pump tens of billions of dollars into a sweeping stimulus project and 10 percent growth followed. China’s success gave markets the impression that its leaders could wave some magic wand and growth would be the result.
Magic is in short supply now. Local governments are cash- strapped and awash in debts that could turn bad. The euro zone seems locked into permanent-crisis mode while the U.S. is bogged down with debt, economic stagnation and political paralysis. China proved it can live for a few years without U.S. and European customers, but not forever.
The bigger topic is politics amid this year’s leadership shift. Instead of tackling the issues of growth and economic reform, officials are punting on big decisions. As such, we are now officially living in the “G-Zero” era that Ian Bremmer, the president of Eurasia Group in New York, described in his new book
“Every Nation for Itself.”
At one time the weaker links within the Group of Seven nations were supported by the others. Those days are gone and now that China is sputtering, the G-Zero reality is upon us and manifesting itself in disturbing ways.
Take Asia’s surge of nationalism. Political scientists have loads of theories about why China, Japan and South Korea are suddenly at loggerheads: bad blood over World War II, energy needs, designs on controlling the Asian seas, the power vacuum left as the U.S. focused on two intractable wars. One theory that deserves more attention is how these countries deflect the blame for troubles at home.
In Japan, Prime Minister Yoshihiko Noda is spectacularly unpopular after raising taxes and restarting nuclear reactors that were shuttered following last year’s earthquake. Playing up territorial disputes allows him to change the subject and throw a bone to Japan’s influential right-wingers. In Seoul, President Lee Myung Bak has been embarrassed by corruption charges against his family. Fanning popular anger about South Korea’s status in Asia has shifted the national dialog.
The same strategy prevails in China. Unwelcome headlines focus on the widening gap between rich and poor, the Bo Xilai scandal, and charges that China fudges economic and pollution statistics. Turning the public’s attention to China’s former colonizers has been a political winner.
Asia’s Loss
The loser in all this is economic cooperation in Asia. (MXAP) Also on the losing side is vital economic change in China. Over the last decade, Wen and President Hu Jintao produced rapid expansion, but few of the structural reforms China needs for balanced growth in the decades ahead. State-owned enterprises and banks are more dominant than ever, producing huge misallocations of resources and priorities. Meanwhile, no effort has been made to build a market that promotes domestic consumption.
Rather than retool the economy, China is content to rely on the old fast-growth, export-driven model. The trouble is, the Wen-Hu era lulled markets into counting on the constant injections of stimulus spending that gave China a unique, yet unsustainable, foundation. If China isn’t a gigantic bubble economy, it’s one made up of many smaller bubbles -- property, stocks, exports. These are the result of spending-induced growth and imbalances that might breed trouble down the road, including inflation and a bad-loan crisis.
Traders looking for another dose of stimulus are expressing their disappointment that none seems forthcoming. The Shanghai Composite Index (SHCOMP) is down 13 percent so far this quarter. Those declines may accelerate as China’s leadership transition distracts lame-duck officials from giving markets their fix. The same goes for a world economy more devoid of growth engines than ever.
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China gets worst ranking in-global poll since 2010
Global investors are losing faith in China, giving the country’s markets their worst rating in more than two years in the latest Bloomberg poll.
About a quarter of those surveyed say they expect Chinese markets to be among the worst performers over the next year. That’s the highest negative reading that the country has received in the quarterly Bloomberg Global Poll since January 2010 and was second only to the 45 percent rating that the European Union received in the Sept. 4 survey.
China “will suffer disproportionately from a global slowdown in growth,” said Benjamin Dunn, a poll participant and chief operating officer in Crested Butte,
Colorado, for portfolio management company Alpha Theory, in an e-mail. It “will be unable to prevent a hard landing” of its economy.
The U.S. again came out on top in the poll of 847 investors, analysts and traders who are Bloomberg subscribers: 46 percent say its markets will be among those offering the best returns over the next year, the same as in the previous survey in May. Close to three-quarters expect the Federal Reserve to act next week to support the economy, either by extending its pledge of low interest rates, buying bonds, or by doing both.
Commodities in general and gold in particular gained favor with investors in the poll. Eighteen percent of those surveyed expect commodities to offer the highest returns over the next year. That’s up from 13 percent in May and was second only to stocks, which won the backing of a third of investors. Gold came in third, with 16 percent, up from 11 percent in May.
Commodity Prices
“Monetary easing by global central banks will push commodity prices higher,” Anuraj Benara, a poll respondent and senior manager of institutional equity sales for SMC Global Securities in Mumbai, India, said in an e-mail.
Some investors also are turning bullish on crisis-racked Europe, though a greater percentage remains bearish. More than one in five picked EU markets as among those that will offer the best returns over the next year. That’s the highest reading for the region since the poll began in 2009 and was second only to the U.S. in the latest survey, which was taken before the European Central Bank decided yesterday on an unlimited bond- purchase program. Brazil was third and China fourth in the poll.
China was a favorite of global investors in the wake of 2008-09 financial crisis, as stepped-up government spending and interest rate cuts powered the economy to a year-over-year growth rate of 11.9 percent in the first quarter of 2010.
Enthusiasm Waned
Investor enthusiasm for the country has since waned as growth has slackened, first in reaction to government efforts to contain inflation and puncture a property price bubble, and more recently due to a slowdown in Europe. Gross domestic product rose 7.6 percent last quarter from a year earlier, the slowest pace in three years.
More than three of five poll respondents described the Chinese economy as deteriorating, up from less than one in three in May. One-third rated the risk of a hard landing as high, up from 23 percent in May. Another 44 percent saw it as a “medium threat.”
Outgoing Communist Party chief Hu Jintao has held back on steps to spur the slowing economy, raising the risk that the country will miss its 7.5 percent growth target for this year.
“The changing of the political guard in China has slowed the government’s stimulus response,” Kim Caughey Forrest, senior equity analyst for Fort Pitt Capital Group in Pittsburgh, who took part in the poll, said in an e-mail. “It’s pretty clear that current leadership is not going to start new programs, so the lag
time is even longer on any stimulus.”
Standing Suffered
Hu’s standing with investors has suffered ahead of the leadership change later this year. Two in five voiced pessimism about the impact of his policies on the investment climate in the country. That’s up from less than one in three in May and is the highest negative reading since the poll began asking that question two years ago.
“The political environment in China is more favorable to hiding real problems” such as the growing level of non- performing bank loans, said Kevin Guezo, who oversees foreign exchange and interest rate derivative sales at Credit Mutuel Arkea, a French cooperative bank in Lyon, France. Guezo took part in the poll and shared his views in an e-mail.
Investors also have turned more pessimistic about the global economy. About half described it as deteriorating, compared with 37 percent who said that in the last poll. Those in the U.S. were the most downbeat.
Investor Assessments
The poll also reflects an erosion in investor assessments of the U.S. economy, with 22 percent saying the economy is deteriorating, compared with 18 percent who said that in May.
Federal Reserve Chairman Ben S. Bernanke is expected to take further steps to promote growth at the central bank’s meeting on Sept. 12-13, according to the poll. More than one in three of those surveyed look for another round of quantitative easing, or bond buying, from the central bank.
Bernanke has made “it patently clear that the Fed will take any action it feels it needs to to try and address its mandate -- full employment and stable prices,” Forrest said. “Given the economy has probably slowed, from all the signs we observe in government and company data, we think he” will go ahead with QE.
The Fed, which cut its target for the federal funds rate to zero to 0.25 percent in December 2008, has said it expects to keep the overnight interbank lending rate “exceptionally low” at least through late 2014. A majority of investors polled do not see the Fed raising rates before 2015, with 16 percent saying an increase won’t come until 2016 or later.
Housing Market
The low rates have helped the housing market. The S&P/Case- Shiller index of home prices in 20 cities climbed in June from a year earlier, the first gain since September 2010, according to a report from the group last month.
Forty-six percent of investors surveyed expect U.S. house prices to increase further in the next six months. Only 14 percent see them falling.
Investor enthusiasm for stocks ebbed in the latest survey. Thirty-seven percent say they plan to increase their holdings of equities in the next six months, down from 40 percent in May and the lowest since that question was first asked in 2010.
The increased caution is most evident when it comes to Asian markets. One third forecast that the MSCI Asia Pacific Index will be higher six months from now -- the least bullish reading in almost two years. The stock gauge rose 0.1 percent yesterday to 115.94 after falling on Wednesday to its lowest level since July 27.
Gold Attractive
An increasing number of investors are attracted to gold, according to the poll. A majority expect gold prices to be higher in six months’ time, while about one in three intends to increase their holdings of the yellow metal.
Gold prices rose to the highest since March yesterday after the ECB’s bond-purchase decision. Futures for December delivery gained 0.7 percent to settle at $1,705.60 an ounce at 1:45 p.m. on the Comex in New York.
Oil is also gaining favor among investors, according to the poll. One in five plan to increase their exposure to oil in their portfolios over the next six months, up from 14 percent in May.
More than two in five see prices rising over that time frame, roughly double the amount who project them falling. Crude oil for October delivery advanced 17 cents to settle at $95.53 a barrel on the New York Mercantile Exchange yesterday.
Twenty percent rate the risk of a Middle East war as high, up from 15 percent in May.
As has been the case since October 2009, bonds were picked as the asset class projected to have the worst returns over the next year.
The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. The poll has a margin of error of plus or minus 3.4 percentage points.
