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Home > Blogs > Anthony Harrington > Betting against China: Part 3

Betting against China: Part 3

Chinese economy | Betting against China: Part 3 Anthony Harrington

In this final part we look at two major reports on China, the World Bank’s latest quarterly report (WBQR) on the major economic trends in China, and CSLA’s predictions for China in 2011.

We also glance briefly at two further ideas. One is a seminal Viewpoint featured on QFINANCE, namely Professor Richard Werner’s outstanding contribution “Understanding and Forecasting the Credit Cycle—Why the Mainstream Paradigm in Economics and Finance Collapsed”, which argues that since the classical economic model of market equilibrium is completely void, the actual bar for reasonable government intervention in markets is far lower, in reality, than is supposed by the classical model (where the markets are deemed to know best). If the 2008 crash showed us anything it was that the markets know sweet Fanny Adams about anything and, left to their own devices, will charge like lemmings right off the cliff, at high speed.

The takeaway from Werner’s Viewpoint in the current context is that those betting against China seem to be forgetting that the People’s Republic can tweak matters at will, changing the fundamental rules of the game far more readily than any democracy. This doesn’t guarantee that their tweaks will work, but it doesn’t make them powerless in the face of relentless market forces either.

The other “idea” is Michael Pettis’s illuminating comparison of China with Japan. Pettis doesn’t argue against a “China-bust”. What he points out is that it is probable that unlike the predictions of the doom merchants, should China implode in some way which sends it into a Japan-style “lost decade” and cancels its status as the global growth engine, global GDP might not be quite so badly affected as people think.

He points out that despite being 17% of global GDP, when Japan failed, global GDP recovered pretty smartly. Countries that are huge exporters actually depress GDP growth elsewhere so when they “fail” that takes the lid off and allows other economies to come back to the boil. Interesting idea, n'est-ce pas?

Now to the reports. Although both our featured reports are aware of what analysts quaintly term “downside risks”, meaning those things that can cause the economy to vanish down the plughole, neither is of a tenor that would give any comfort to anyone wanting to go short on China.

The WBQR points out that though China’s growth fell back a touch in the third quarter of 2010, it did so from a frenzied peak of 10.6%, which was a tad overheating anyway. Actual growth for the quarter was 9.6% year on year. China’s export machine, it points out, is revving up again as global demand picks up and net external trade is once again making a very positive contribution to year on year growth. The WBQR expects China’s 2010 GDP growth to even out at around 10%, with some falling away to around 8.7% in 2011. Dealing with hot currency flows from developed market investors chasing emerging market super profits will give China some challenges, but the Government has tools to provide protection against unwanted capital flows, the report says. The WBQR authors are relatively sanguine that Chinese officials will come up with policies that will rebalance the country’s economy towards enhanced domestic demand and a more developed services sector. The 12th Five Year Plan (5YP) which kicks off in 2011 should go some way towards achieving this.

The CLSA report, which is hosted by the excellent zerohedge, sees Beijing as being “firmly on top of the liquidity bull unleashed in 2010,” but acknowledges that there will be challenges as the government moves from stimulus to normalizing or even tightening monetary policy. CLSA expects tightening to end by around mid-2011 with a potential market rally to follow. If they are right, of course, that is a very long time to be on the wrong end of a short position. Betting against China in the medium term might conceivably be a reasonable play. Dashing in right now looks like a good way to find out what bankruptcy feels like…

Further reading on the Chinese economy:

Tags: banking , Beijing , China , economic recovery , fiscal tightening , global imbalances , hot money flows , inflation , Japan
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