April 27, 2010
Few topics are as contentious as the fate of the Chinese economy. The bulls argue that its growth will propel the global economic recovery and that China will ultimately supplant the United States as the leading world superpower. According to the bears, the Chinese economy has been fueled by unsustainable fiscal stimuli and is a prototypical bubble poised to burst.
These divergent outlooks were on display as five of the foremost thinkers in the investment industry tangled over China’s future at last week’s Strategic Investment Conference, held in San Diego and hosted by Altergis Investments and Millennium Wave Investments. Millennium’s John Mauldin, author of popular Thoughts from the Frontline newsletter, was joined on the panel by Gary Shilling, President of the economic consulting firm that bears his name, David Rosenberg, Chief Economist and Strategist at Gluskin Sheff, author and Harvard professor Niall Ferguson, and George Friedman, founder and CEO of the political intelligence company Stratfor.
Bubbles, bad loans, and overcapacity
Shilling advanced the bearish case, arguing that China in the short term is nothing more than a “house of cards.” According to Shilling, China has fed its economy a $585 billion stimulus program, which would be equivalent to a $1.7 trillion stimulus for the US’s economy, which is nearly 2.9 times the size of China’s. A byproduct of that stimulus was 11.1% GDP growth in the first quarter of this year.
That growth, though, was accompanied by a trade deficit, China’s first in six years.
Where did that stimulus go? Toward infrastructure projects that built excess manufacturing capacity and to bank loans, many of which may never be repaid, Shilling said.
Mauldin echoed this concern. “I don’t get China,” he said, noting that investors have more attractive options among other developing economies. “How can you have an economy where 50% of its GDP last year was bank loans, a lot of which are non-performing?” Investors in China face huge uncertainty, he said.
Shilling questioned the quality of China’s growth. The Chinese, he said, have built more industrial capacity than can be justified by domestic or foreign demand. Overbuilding has insidiously distorted China’s reported GDP growth, Shilling said, because, for example, it takes a lot of steel and cement to build steel or cement plants.Low quality is evident as well in China’s lack of environmental standards, Shilling said, noting that China does not have an equivalent of the EPA. “If they want to build a road, and you are in their way, you are likely to become part of the pavement,” he said.
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