Most global investors predict Chinese growth will slow to less than half the pace sustained since the government began dismantling Mao Zedong’s communist economy three decades ago, a Bloomberg poll indicated.
Fifty-nine percent of respondents said China’s gross domestic product, which rose 9.5 percent last quarter, will gain less than 5 percent annually by 2016. Twelve percent see such a slowdown within a year, and 47 percent said it will occur in two to five years, the quarterly Bloomberg Global Poll of investors, analysts and traders who are Bloomberg subscribers showed.
China, which saw its exports tumble the most since at least 1979 amid the 2008-09 global crisis, may not be able to rely on trade in any prolonged demand slump in Europe and the U.S., now battling to avoid returning to a recession. Managing the economic downshift would fall to the Communist Party’s next leaders, as President Hu Jintao and Premier Wen Jiabao begin their transition from power late next year.
“If we’re not buying things, they’re not making them,” said Charles Doraine, Chief Executive Officer of Doraine Wealth Management in Corpus Christi, Texas, and a respondent in the poll of 1,031 investors, analysts and traders taken Sept. 26. The poll’s margin of error was plus or minus 3.1 percent.
Jerome Selle, chief investment officer at MW Gestion in Paris, cited a potential Chinese real-estate bubble and elevated inflation, along with weakening American and European expansions, as warning signals for the Chinese.
Even so, for many investors, the short-term view remains positive. Asked to identify the market offering the best returns over the next 12 months, 23 percent selected China, second only to the 30 percent who picked the U.S. The Shanghai Composite Index (SHCOMP) of shares is down 16 percent this year, compared with an 8.5 percent drop in the Standard & Poor’s 500 Index and 12.2 percent loss in the MSCI World Index. The Shanghai Composite slid 1.1 percent today.
Since Deng Xiaoping started the shift to free-market policies in 1979, China has grown at an average annual rate of 10 percent. The economic transformation has lifted more than 600 million people out of poverty, made China the world’s largest exporter and cemented the Communist Party’s hold on power.
Now, four years into a financial crisis triggered by the collapse of the U.S. mortgage-securities market, some investors are beginning to doubt China’s staying power. Investors labeled the Chinese economy as “deteriorating” rather than “improving” by a nearly three-to-one margin, 38 percent to 13 percent. A plurality of 47 percent called it “stable.”
Clash in Views
Investors’ outlook for the world’s second-largest economy clashes with that of China economists including those at HSBC Holdings Plc, Nomura Holdings Inc., Capital Economics and the nation’s State Council, or cabinet equivalent. Lu Zhongyuan, deputy director of the State Council Development Research Center, said at a briefing in Beijing yesterday that growth in the next five years will likely exceed 8 percent.
China’s statisticians publish quarterly GDP data ahead of their counterparts from countries including the U.S., Germany and Japan, and some analysts have questioned their accuracy. A candidate to succeed Wen, Vice Premier Li Keqiang, viewed the GDP figures as unreliable, the Telegraph reported, citing a 2007 diplomatic cable that was published by Wikileaks.
“Looking at China is much like trying to fully understand the balance sheet of a big bank like Citigroup,” said Andrew Paolillo, portfolio manager at Rocky Hill Advisors in Peabody, Mass. “It’s such a black box that from the outside there is no possible way you can truly see what is actually there.”
China’s coal mining industry is a barometer of gathering signs of economic weakness, said Michael Shamosh, chief investment officer at Corby Capital Markets in Boston. Yanzhou Coal Mining Co., China’s fourth-biggest producer of the fuel, has dropped about 46 percent since a high on May 31 in Hong Kong trading.
“Something is amiss,” Shamosh said. “Nothing is more important to China than coal.” He said a decline in the price of copper, down almost 25 percent since Aug. 1, is another indicator of a slowdown, because China’s urbanization and housing boom made it the world’s largest consumer of the metal.
Doraine echoed the observation, saying “The price of raw materials is dropping. It means China’s not buying them up.”
Chinese officials are trying to shift the economy to a more consumer-driven model after a global credit freeze contributed to a decline of about $230 billion in the country’s exports in 2009, the most since National Bureau of Statistics data began in 1979.
“China’s economic growth engine needs a tune up,” World Bank President Robert Zoellick said in a Beijing press briefing Sept. 5. “It’s hard for me to see that a continued reliance on export-led and investment-led growth will work for China over the next 10 years.”
American investors were more pessimistic about China’s prospects than their counterparts in Europe and Asia. The U.S. was the only region where more investors described the Chinese economy as deteriorating than stable, and 21 percent of American respondents said China will offer the worst investment returns over the next 12 months, second only to the European Union.
Those surveyed retain confidence in the ability of China’s leadership to navigate the mounting economic challenges. By a margin of 48 percent to 40 percent, investors said they were optimistic about President Hu’s investment policies.
A successor to Hu is scheduled to be picked at a conclave of Communist Party leaders late in 2012, with Hu and Wen stepping down from their government posts in March 2013.
Better Than Japan
Bloomberg customers gave Hu better marks than Japanese Prime Minister Yoshihiko Noda: only 24% said they were optimistic about his policies, against 45 percent who described themselves as pessimistic about Japan’s sixth head of government in five years.
In the U.S., almost three times as many investors were happy with China’s leader as backed President Obama.
Todd Martin, an Asia equity strategist for Societe Generale Asia Ltd. in Hong Kong, credits China’s government with combating inflation and a property bubble. Consumer prices rose 6.2 percent in August from a year before, slowing from a 6.5 percent increase in July.
“So long as China is willing to reform and adapt itself, its standard of living and opportunities to invest and make excellent returns are vast,” Martin said.
Over the past 20 years, China’s lowest growth rate was 6 percent in the fourth quarter of 1999, in the aftershocks of the 1997-98 Asian financial crisis.
Split on Consequences
A “hard landing” of less than 5 percent growth for the world’s most populous nation would be “disastrous” for the world economy, said Qu Hongbin, an economist with HSBC in Hong Kong. The nation wouldn’t be able to create enough jobs for those entering the workforce, sparking a “serious social problem,” he said. “I’d rather bet that it’s the end of the world in five years than to bet on China’s growth falling to 5 percent.”
Not all economists say 5 percent growth is bad for China. A successful shift to household spending-led expansion would reduce the chance of higher unemployment and excess borrowing to fund investment, according to Michael Pettis, associate professor of finance at Peking University.
“China can tolerate a much lower growth, if they shift the model,” Pettis said.
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