China: is it a big bubble about to burst?
Patrick Collinson, guardian.co.uk, Friday 27 April 2012
Diana Choyleva is the bear in the China shop. The analyst from Lombard Street Research says last week's China GDP figures – which revealed growth slowing to a three-year low – are an early warning signal of the hard landing to come.
Dig deep into the data, she says, and you'll find that Chinese exports are falling. All that is propping up the economy is gargantuan investment in infrastructure financed by state- directed banks that look more and more like Western banks just before the collapse of 2008. Except they are bigger and badder.
Choyleva radiates a pessimism that is almost unique among Hong Kong's investment professionals. Westerners, she says, are so awed by the China dream they can't see the coming China-geddon. The excesses that drove the West into a financial crisis and, in Europe, an economic depression, are gripping the Chinese economy, too. "It's just that they have become bigger," she says. The country's vast pool of savings is being squandered on dead-end infrastructure projects that make Japan's roads to nowhere look like prudent planning.
"China's miracle growth is over," she proclaims, saying that if Chinese policy makers get it right they might, just, see the country's growth halve to 5% or below. Get it wrong, and the consequences could be devastating not just for China but for the rest of the world, too. "Building those roads to nowhere can go on for a long time, but ultimately financing it will become unbearable," warns Choyleva.
As long as US and European consumers were accumulating colossal amounts of debt, much of it to pay for goods made in China, the merry-go-round worked just fine. But as western economies deleverage, the driver for growth has been extinguished.
"The financial crisis has changed everything," she says. "It can no longer rely on abroad to buy its excess production. The US will consume less, and produce more. The years of current account surpluses are over, rendering the growth model obsolete."
Meanwhile, the banks that have been the lynchpin of growth are insolvent, and their mountain of bad loans will eventually lead to a liquidity crisis.
But Choyleva's is a lone voice. At brokerage CLSA, one of the region's biggest investment banks, China macro strategist Andy Rothman, a former US diplomat, says the wall of worry comes from a fundamental misunderstanding.
The first myth to explode, he says, is that it is an export economy. It's not. It assembles the likes of iPads (they are all made in China), but the value remains, mostly, in the US. Even Korean firms make more money from the iPad than China. Over the last decade, while it has enjoyed GDP growth of 10% per annum, only 1% of that was from exports. What we haven't woken up to is that China is a domestic growth story.
It's not an unbalanced export-only economy – instead, it's the world's best domestic consumption story, claims Rothman. It is being driven by "phenomenal" increases in wages for average workers; incomes are up 173% over the past 11 years. That also puts the so-called property bubble into perspective. The price per-square-foot of an apartment in a major Chinese city has leaped by nearly 10% a year, for many years. But as incomes are rising even faster – by around 13% a year – it's not the issue it became in the west.
Better still, it's not on the never-never. Mortgages are still in their infancy in China. One in five first-time buyers purchase entirely with cash. The average downpayment is 30% – a long way from the 100% loans that became common in the US and the UK.
"Even if prices fall by a third, almost no one will actually be underwater," says Rothman. Westerners are also obsessed with startling property price rises in Shanghai and Beijing. But go into the interior and prices are "dramatically lower," he says.