China’s economy is headed for a “hard landing” this year as weaker demand overseas chokes off exports, said Gary Shilling, who correctly forecast the U.S. recession that began in December 2007.
A Chinese government report yesterday showed that export orders fell last month even as manufacturing expanded. The Shanghai Composite Index dropped 1.1 percent yesterday as stronger manufacturing boosted concern that the world’s second-largest economy will decelerate further as the government refrains from loosening monetary policy to tame inflation and curb property prices.
“They slammed on the brakes,” Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said at the Bloomberg Link China Conference in New York yesterday. “Transition is not easy because they are geared up to exports.”
China’s economy expanded 10.4 percent annually in the past 10 years, five times the pace of the U.S., as the government boosted spending on roads and bridges and manufacturers exported everything from toys to socks. Shilling defines a hard landing as a growth rate below 6 percent.
The economy grew at a 9.2 percent rate in 2011 and its expansion will slow to 8.5 percent this year, according to economists’ estimates compiled by Bloomberg.
China’s official purchasing managers’ index increased to 50.5 from 50.3 in December, exceeding the median estimate in a Bloomberg survey for a reading below the 50 level that divides expansion from contraction. The data may have been distorted by the weeklong New Year holiday. Readings for new export orders and imports contracted for a fourth month.
Shifting to Consumption
The economy will grow at least 8 percent over the next decade as growing domestic consumption and investment in new industries offset the export slowdown, according to Carlyle Group LP and Leeb Capital Management.
“China is likely to grow between 8 and 10 percent or so for the next 10 years,” said David Rubenstein, co-chief executive officer of Carlyle, a private-equity firm. “China to me is the most attractive place in the world to invest” outside the U.S., he said at the conference.
Policy makers are transforming their economy toward consumption to reduce the reliance on exports and policy initiatives encouraging entrepreneurship will power economic growth, said Rubenstein.
Stephen Leeb, president of Leeb Capital, said China’s investment in new industries, such as renewable energy, will help the economy “easily” maintain an annual growth rate between 8 percent and 10 percent.
“The next 10 years are going to be probably among the most intense in the history of any industrial country in terms of creating new industries,” Leeb said at the conference.
Shilling, 74, has been calling for a hard landing in China since at least a year ago, advising clients to sell copper and the Australian dollar as a play on the downturn.
Shilling forecast the U.S. recession in 2007 and warned investors a year earlier that residential real estate was a bubble about to burst. As the Standard & Poor’s 500 index fell a more-than 12-year low in March 2009, he said that higher unemployment would curb consumer spending, leading to “weaker stocks.” The gauge has since rallied 96 percent.
China’s growth will be undermined by a cooling property market, said Michael Shaoul, chairman of New York-based Marketfield Asset Management, which manages $1.3 billion.
Lower housing prices will feed “rapidly to the construction, and then it feeds back to the credit system,” said Shaoul. “That’s the problem China is going to face in the next 12 to 15 months.”
About 61 percent of investors in a Bloomberg survey in December said that they anticipate a crash in the financial industry by late 2016. China’s new loans totaled $4 trillion in the past three years, twice the size of the Italian economy, raising concern that some of the lending to local governments and property developers will turn sour.
China’s government won’t allow the nation’s banks to trigger another credit crisis, said Joseph Taylor, an emerging-markets strategist at Boston-based Loomis, Sayles & Co., which oversees $163 billion in assets.
“Banks are still the instrumentality of the state,” Taylor said at the conference. “They won’t be allowed to go under. They won’t be allowed to trigger a systemic crisis.”
While the economy won’t get to crisis point, growth will probably slow because China has had “almost no success” in increasing consumption as a percentage of gross domestic product, and the nation has too much bad debt, Taylor said.