Nomura: 5 Reasons to be Pessimistic About China

Just passing along an out of consensus view.  This was one of David Rosenberg’s tail risks mentioned the other day and is obviously a big driver of global growth.  While China appears to have landed softly, Nomura analysts still see risks to the downside:

“We reiterate our out-of-consensus view that growth will surprise on the downside in H2. We expect GDP growth to slow to 7.3% y-o-y in H2 from 8.1% in H1, for a full-year 2013 average of 7.7%, while the consensus expects the growth recovery to sustain above 8% throughout 2013.

First, there are increasing signs that the government is concerned about financial risks. The China Banking Regulatory Commission (CBRC) has asked banks to control the risks in the “fund pools” practice, which allows banks to pay back maturing wealth management products by issuing new products.

Second, another round of energy/utilities price reform appears to be in the pipeline. On 20 February, the National Development
and Reform Commission (NDRC) and the Ministry of Railway (MOR) raised the rail freight tariff by 13.0%, from RMB0.1151 per ton-km to RMB0.1301, the largest hike since 2003. The tariff hike suggests that the government may move to lift other administratively suppressed prices, such as electricity and other public utilities, which will exert upward pressure on inflation.

Third, the property price rebound – the composite property price index of 70 cities has risen for seven consecutive months – may
force the government to tighten credit supply/M2 growth, which should also act as a drag on growth, since property investment is a large component of fixed asset investment.

Fourth, local governments have lowered their growth targets for 2013 by an average of 0.5pp from 2012.

Lastly, the severe air pollution reported throughout China could act as a wake-up call for Chinese leaders, and may spur them to rethink the current growth model.”

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Why is it that so many who are free market capitalists think that a centrally planned economy like China’s with politically driven mis-allocation of capital can sustain long-term growth. At some point their growth model will break down, it is only a question of when.

    • On the other hand, if it continues to work, we will have to reconsidder a few theories. They seem to be adept at managing fiat currency, although it seems to be a little too fast and loose. It would seem that it shouldn’t be working as well as it is but…no crash yet. For me the jury is still out. I wouldn’t short ‘em. Yet.

      • They’ve been doing a good job avoiding some of the mistakes we made post WWII, but now they’ve almost caught up to the West and are therefore facing the same economic problems we have. In others words they’re in unchartered territory. Let’s see how well the central planners do, when thers’s no precedent to base your policy on.

    • I don’t see a bright line separating “centrally planned” in the way you use it, and the management of our financial sector and TBTF banks.

      My point is, in both cases a small group of people are attempting to manage something which is too large, and with implicit guarantees of government bailouts to back them up, they are probably both in some sense examples of “central planning.” The difference is in China you can always be involuntarily promoted to “organ donor” if you screw up too bad, while our bankers seem to be immune to any kind of punishment. What is John Corzine up to these days anyway?

  2. See also the nice piece on China by Edward Chancellor and Mike Monnelly of GMO. The thing is, one can engineer as many soft landings as one wants by using a credit pump. Therefore, speculating about whether the economy in China will ‘hard’ land or ‘soft’ land is not the interesting point, although it is what most economists focus on. As always, the key point is to understand what is happening to the credit machine that feeds the economy.

    • I think Chinese GDP will end up at 8%+ this year. Local municipalities tell central planners what local GDP came in at. Their command is to generate 8%. If they come in at say 4%, they will say 8% anyways.

  3. In the end one has to ask two questions:
    (a) since Ponzi financing can go on a long time (and if you’re Scott Sumner, essentially forever, if you keep NGDP growing), when will there be a policy “mistake” (either publicly or privately driven). I’d say when you see truly private credit vehicles contracting then that is a good tell. These “wealth management products” as well as the asset-backed debt market which started to emerge a few years ago is the mirror to the decline in ABCP in the US. Of course, when the government says tighten, same outcome in every country.
    (b) whether debt/GDP will stabilize? The most recent credit pump in 2009 showed (change in GDP)/(change in debt) ~ 0.3, that does not look very encouraging, but is not a sufficent condition for a downturn since this is simply government policy, but over time this undermines private sector confidence which have slowly begun to learn how to move capital around and out of China. You can’t pent up this kind of freedom forever.