Global investors are bracing for the end of China’s relentless economic growth, with 45 per cent saying they expect a financial crisis there within five years.
An additional 40 per cent anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7 per cent are confident China will indefinitely escape turmoil.
“There is no doubt that China is in the midst of a speculative credit-driven bubble that cannot be sustained,” says Stanislav Panis, a currency strategist at TRIM Broker in Bratislava, Slovakia, and a participant in the Bloomberg Global Poll, which was conducted January 21-24. Panis likens the expected fallout to the aftermath of the US subprime-mortgage meltdown.
On January 20, China’s National Bureau of Statistics reported that the economy grew 10.3 per cent in 2010, the fastest pace in three years and up from 9.2 per cent a year earlier. Gross domestic product rose to 39.8 trillion yuan ($6 trillion).
Any Chinese financial emergency would reverberate around the world. The total value of the country’s exports and imports last year was $3 trillion, with about 13 per cent of that trade between China and the US. As of November, China also held $896 billion in United States Treasuries. The trade and investment links between the two nations were underlined with Chinese President Hu Jintao’s visit last week to the White House for meetings with President Barack Obama.
Worried neighbours
Investors’ concern contrasts with Chinese government statements on the outlook for the economy, which is poised to overtake Japan as the world’s second biggest. The Politburo said last month that the nation had a “sound base” for stable and fast growth in 2011 after consolidating its recovery.
In an interview in Davos yesterday, Li Daokui, an academic advisor to the central bank, said he doesn’t expect any “hard landing” and the economy may expand about 9.5 per cent this year.
Fifty-three per cent of poll respondents say they believe China is a bubble, while 42 per cent disagree. China’s neighbours are the most concerned: 60 per cent of Asia-based respondents identified a bubble in the world’s second-largest economy.
Worries centre on the danger that investment, which surged almost 24 per cent in 2010, may be producing empty apartment blocks and unneeded factories.
‘Major dislocations’
Jonathan Sadowsky, chief investment officer at Vaca Creek Asset Management in San Francisco, says he is “exceptionally worried” that the Chinese would eventually face “major dislocations within their banking system”.
Chinese authorities also raised interest rates twice in the fourth quarter in a bid to choke off inflation, a sensitive political issue since the 1989 Tiananmen Square protests, which followed uncontrolled price increases. Food prices last year rose 7.2 per cent, according to the National Bureau of statistics.
Haroon Shaikh, an investment manager with GAM London Ltd, cited “rapid wage inflation” and soaring property prices as the financial markets’ chief concern.
Li said rising real estate prices are the “biggest danger” to the Chinese economy, in an interview with Bloomberg News in Davos, Switzerland. The People’s Bank of China should “gradually increase rates in the first and second quarter,” Li said.
Since peaking on November 8 at 3159.51, the Shanghai Composite Index has slid about 14 per cent. “The market is right to be nervous,” Michael Pettis, a finance professor at Peking University’s Guanghua School of Management, wrote in his January 26 financial newsletter.
Worst market
Some investors remain unbowed. “China can continue to grow over 10 per cent for the better part of the next five years,” said Ardavan Mobasheri, head of AIG Global Economics in New York.
Still, the poll found other signs of mounting investor caution toward China, where three decades of market-oriented reform has obliterated a legacy of Maoist impoverishment.
Asked to identify the worst market for investment over the next year, 20 per cent of poll respondents say China versus 11 per cent in the last poll in November. Almost half of those polled — 48 per cent — say a significant slowing of growth was very or fairly likely within the next two years.
Michael Martin, senior vice president of MDAvantage Insurance Company of New Jersey, says the Chinese government “has executed brilliantly” in managing the economy. The government’s capacity will be tested as the economy grows and becomes more complex, he says.
Chinese officials have said they intend to wean the economy off its reliance upon exports, the source of trade tensions with the United States, in favour of greater domestic consumption.
