China heading for a hard knock?

Asset bubbles, social problems mean China could face economic crisis next – warning signs

BEIJING –  China helped save the world from sinking into a deep crisis after US mortgage-related debts imploded in 2008. But this time, as we enter another economic dip, the world may not be so lucky.
Some China market watchers, local and foreign, have become decidedly pessimistic about the outlook for China.  Asset bubbles and social problems in China as well as dramatically worsening economic conditions in its major export markets are worrying investors.

If China’s economy gets knocked hard, suppliers of its resources in Africa and elsewhere will get hammered too.China consumes roughly half of the world’s coal, iron ore, cement and steel. It has a voracious appetite for gold. A major crisis in China will inevitably mean it takes the world longer to get back on its feet.

South Africa, like other developing nations, has become increasingly dependent on China. The Middle Kingdom is now South Africa’s largest export destination. 

How likely is a major financial crisis in China?

China’s economic growth rate is has been repeatedly revised downwards in recent weeks and is expected to continue to slow into next year. Global financial services firm UBS, for example, has just lowered its forecast to about 9% forChina’s Gross Domestic Product (GDP) growth this year; it expects China’s GDP growth rate to decline to just over 8% in 2012.

Robert Zoellick, president of the World Bank and who has lauded China in the past for its successful economic reforms, warned at the weekend that China needs to make some important changes, and fairly quickly, if it is to avoid major problems. In a visit to the country, he said that as the world enters a “danger zone” China needs to hasten its transformation from an export-led economy to one that is consumption driven.

Zoellick said swift structural changes were required. However, only days earlier, Premier Wen Jiabao intimated that no structural changes were coming in the short-term.

Wen said China must stay its course and that its “macro-control and adjustment cannot be changed”. China has longer-term plans to change its economy from being manufacturing-dependent and wants to introduce more scientific innovation and creativity to its industrial and commercial sectors.

But, curbing inflation is the top priority for China for now, Wen said last week. This is a message he has been repeating for much of this year.

Inflation is indeed a worry. The official rate has moved up to 6.5% (consumer price index) in July, the highest year-on-year increase in three years. Inflation as it is experienced by ordinary citizens is much higher.

Restaurant owners speak of meat prices jumping by 25% in recent weeks. The authorities have put forward a more modest figure of around 15% as the rate at which food prices have increased this year compared to last.

China’s social and economic problems are related. Inflation is a political risk for the Chinese government, and has sparked protest action around the country. As long as everyone’s lives keep improving, few are likely to question whether it is time to do away with the one party state model. 

But, inflation is just the tip of the iceberg. One institutional investor on the mainland, speaking on condition of anonymity for fear of incurring the wrath of the authorities, told me that he and other asset managers tasked with finding lucrative opportunities have grown increasingly concerned about “an accumulation of major problems”.

We have quite a pessimistic view. We think China will be next. There are lots of bubbles, including in thecurrency and real estate markets. Government has done little to solve the problems,” he said, of the likelihood of a financial crisis in China.

The government has introduced a series of measures to cool the property market, like restricting the number of properties individuals may own. Prices, according to official sources, have retreated in recent weeks, but the asset manager said the Chinese government has done too little, too late.

Less attention has been paid to the currency reserves, which in a nutshell is the problem of China having too much money. Printing money fuels inflation. Banks have been lending vast sums, both on and off balance sheet, igniting fears that China has its own scary debt problem mushrooming behind the scenes.

According to this asset manager, a senior player in a large global company, nowhere is the true investment sentiment about China more apparent than in the emigration trend. Wealthy Chinese people are moving elsewhere in their droves, and many would like to leave, taking their capital with them.

Many are reportedly leaving to avoid detection and punishment for fraud. But, says the asset manager, there is also another reason: Many successful business people want to leave China because they don’t feel financially secure.

Time to buy shares?

Asset managers in China who are prepared to put their names in public to their comments tend to be more optimistic about what’s in store for China. That’s no doubt because the government clamps down very quickly on critics or people believed to be the source of rumour or panic among their citizens.

Right now, the government line is one of keeping everyone calm and optimistic about the state of the economy. Top of the pops in the state controlled media this week has been Li Jiange, chairman of big investment bank, China International Capital Corporation.

Jiange reckons the Chinese stockmarket is approaching its bottom, which suggests it is a good time to buy. But then, he is also a man who believes “the possibility of a double dip global economic recession remains low” – even though the rate of job losses in the US is at its worst since 1945 and Europe and the US seem incapable of resolving their economic problems in the foreseeable future.

As Zoellick said: “China’s structural challenges occur in the current international context of slowing growth and weakening confidence.”  Let’s keep fingers crossed the Chinese government does something smart, soon, or the developed world’s leaders figure out a way to mop up the ugly financial mess that has surrounded us all for about three years – or South Africa will battle to improve its economic performance.


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