Nothing new here, but even bullish Barron’s magazine is calling for a Chinese hard landing in its latest article on China (“Falling Star“).

Barron’s Jonathan Laing puts together the same evidences that we’ve been writing about here for a while and quotes, among others, Jim Chanos: “I’m being conservative when I say that the coming bust in China’s real-estate market will be a thousand times that of Dubai.”

An excerpt of the article is presented below:

This year growth in gross domestic product could slip to 8%—and it may get a lot worse from there… to us it looks like the Great China Growth Story may be falling apart.

One can only remember the triumphalism extant about Japan’s prospects 25 years ago just before its economy went into a two-decade funk.

“I can’t tell you precisely when the downturn will hit,” GMO’s Edward Chancellor says. “No one can. All I know is that China has all the earmarks of a classic mania that will end badly—a compelling growth story that seduces investors into ill-starred speculation, blind faith in the competence of Chinese authorities to manage through any cycle, and over-investment in fixed assets with inadequate returns facilitated by an explosion in credit.”

Unless this … is curbed by the incoming administration of Xi Jinping, says Overholt, China faces the prospect of long-term stagnation—a prospect potentially far worse than that of Japan some 20 years ago.

Japan entered the economic dead zone at a time of broad and robust affluence, with per-capita annual income some eight times that of China’s $5,000 and far more technological sophistication.

… think of the Soviet Union in the 1950s or Japan in the ’50s and ’60s… eventually those economies hit the wall of diminishing returns and never quite caught up to developed economies grounded more in free-market principles and less dominated by selfish special-interest groups [China’s kleptocracy].

… consumption is the yin to investment spending’s yang. And here the Chinese consumer has suffered mightily, accounting for just 35% or so of total spending…

The state-owned enterprises and other state-dominated joint stock companies, which have enormous sway in the Communist Party [China’s kleptocracy], account for more than half of employment and fixed-asset investment in the nonfarm economy. [But] Those businesses don’t make especially good use of their resources. Based on what economists call total factor productivity, which takes into account managerial skill and technological innovation in addition to labor and capital investments, the state companies measure far below the private sector in efficiency.

He [GMO’s Edward Chancellor] terms China a “Field of Dreams” economy built on the shaky premise of build and they will eventually come.

… last year residential construction accounted for 9.2% of Chinese GDP. Compare that with 6% in the U.S. at the peak of its housing boom in 2006. Among major countries, only Spain has hit that level—right before the housing collapse in that country.

 … a major decline in residential real estate and underlying property prices could severely damage the Chinese economy. A falloff in demand for steel, cement, and copper would lead to heavy layoffs. He reckons that some 25% of all Chinese steel consumption goes into residential real estate.

State-owned enterprises and, indeed, the state-dominated banking system have all been drawn to real-estate speculation like catnip. Fitch estimates that some 35% of all bank loans in China are exposed to the vagaries of the Chinese property market. And that number doesn’t capture all the commercial and industrial loans that companies borrowed ostensibly for corporate purposes and then diverted into real-estate development.

Capital flight by corrupt party members and other wealthy Chinese could also shred China’s vaunted safety net of $3.2 trillion in foreign-currency reserves. Northwestern’s Shih estimates that the top 1% of Chinese households have amassed liquid and real-estate wealth of as much as $5 trillion. The gambling mecca of Macau and leaks in the banking systems afford plenty of ways to get money out of the country.

Full article here.

Share →