Photographer: Matthew Lloyd/Bloomberg

Davos Veterans Say Stop Worrying About China's Market Meltdown

  • Delegates say there is a disconnect between economy and stocks
  • China is slowing down, `but it’s not a cataclysmic slowdown'

A year ago, Premier Li Keqiang told the World Economic Forum that his country could avoid a hard landing. As the Swiss town of Davos prepares for the 2016 edition of the conclave, delegates such as Nobel laureate Joseph Stiglitz and Credit Suisse Group AG Chief Executive Officer Tidjane Thiam say he’s still right.

Their stance clashes with the recent sentiment in financial markets, where a sell-off of the yuan and Chinese equities sent shockwaves through commodities markets and helped wipe $5 trillion off stocks worldwide by reviving fears over the global growth outlook. 

Tim Adams
Tim Adams
Photographer: Joshua Roberts/Bloomberg

“Sentiment has likely lurched far too quickly into a bearish posture and over-hyped downside scenarios,” said Tim Adams, the U.S. Treasury’s former point-man on China and now president of the Institute of International Finance. “In the end, China will likely emulate every major economy and muddle through.”

Investors are increasingly concerned about China as a report on Tuesday is poised to show its economy grew last year at the weakest pace since 1990. Further spooking investors is a debt overhang estimated at $28 trillion, currency weakness that risks spurring competitive devaluations elsewhere, and equities’ decline into a bear market.

With China now the world’s No. 2 economy and responsible for about 15 percent of global output, the worry is that its troubles will spread to other nations as it cuts imports of commodities and manufactured goods. A weaker yuan also threatens to deal another disinflationary blow.

Some economists counter that there’s reason for optimism as Chinese consumers are still spending, property prices are stabilizing, demand for exports has picked up and there is plenty of room for fiscal and monetary stimulus if required. Though growth is indeed fading, China is on track to expand 6.5 percent this year, according to the median estimate of economists surveyed by Bloomberg.

“There’s always been a gap between what’s happening in the real economy and financial markets,” said Stiglitz, a professor at Columbia University who will be in Davos. “What’s happening in China is a slowdown by all accounts,” he said, “but it’s not a cataclysmic slowdown.”

To Adam Posen, president of the Peterson Institute for International Economics, the situation is akin to the U.S. savings and loans crisis in the 1980s, which hurt but didn’t cripple the economy. Chinese citizens still have savings, the country has little debt denominated in foreign currency, and banks are displaying no signs of instability, he said.

“I really think people are over-reacting,” Posen, a former Bank of England policy maker, told Bloomberg.

Adam Posen
Adam Posen
Photographer: Simon Dawson/Bloomberg

Even under more adverse conditions in China, the spillover will be limited to about 0.2 percentage point of GDP in the U.S., Europe and Japan, Goldman Sachs Group Inc. economists said in a report this month.

Some argue that the pain will ultimately pay off as China shifts to a more sustainable expansion focused on consumption and services rather than investment and manufacturing.

“Yes there will be growing pains, yes they’re changing their model from export-led capital intensive growth to consumerism, but I think they’ll manage,” Credit Suisse’s Thiam said Jan. 12. “I went to China first in 1984 -- anybody who’s been to China in 1984 can only be a China bull.”

Willem Buiter
Willem Buiter
Photographer: Patrick T. Fallon/Bloomberg

Other visitors to Davos are less upbeat. Citigroup Inc. Chief Economist Willem Buiter has suggested there’s a 55 percent risk China will push the global economy into recession in the next couple of years. And U.K. Chancellor of the Exchequer George Osborne cited a weakening China among the “dangerous cocktail” of threats facing his economy.

There will be plenty of opportunity to debate who is right. Attendees from the country include Alibaba Group Holding Ltd. Chairman Jack Ma, Baidu Inc. President Ya-qin Zhang and Jiang Jianqing, chairman of Industrial and Commercial Bank of China. Hedge fund billionaire Ray Dalio of Bridgewater Associates will join Jiang and Lagarde on a panel focused on where the economy is headed and hosted by Bloomberg.

That the 2,500 visitors to Davos are even discussing China’s potential fall marks a change from most forum meetings over the past decade, when the debate focused on its rise as an economic superpower. This year, the evergreen question “What’s your China strategy?” will likely elicit a completely different answer.

“China and rising tensions between Iran and Saudi Arabia will dominate the hallway conversations,” said Nariman Behravesh, chief economist at IHS Inc. “Markets hate uncertainty. The uncertainty about China is extremely high now.”

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