China Bear Warns Against Too Much Pessimism

A pedestrian walks past buildings in the Lujiazui district of Shanghai.

A pedestrian walks past buildings in the Lujiazui district of Shanghai.

Photographer: Qilai Shen/Bloomberg
  • China has ammunition to counter fallout from lending binge
  • Slower growth won’t feel bad because fewer jobs are needed

Forget about the "precarious" state of China’s banking system seen by hedge fund manager Kyle Bass. And the George Soros notion that China resembles the U.S. before its 2008 subprime crisis. Long-time China bear Jim Walker says the biggest risk now is being too pessimistic.

"The wheels don’t seem to be coming off," says Walker, founder and chief economist of research firm Asianomics Ltd. in Hong Kong, who was voted the best regional economist in an Asiamoney magazine brokers’ poll for 11 years through 2004 when chief economist at CLSA Asia-Pacific Markets. "I was more worried about China four years ago than I am today."

Jim Walker
Jim Walker
Photographer: Goh Seng Chong/Bloomberg

Yet Walker is no China bull. He estimates growth has been 5 to 5.5 percent over the past two years and may slide as low as 3 percent over the next two to three years. A massive stockpile of bank reserves give it the ammunition to deal with any fallout from a lending binge after the global financial crisis, while its high savings rate provides a glide path to slower growth, enabling the longer-term tackling of problems, he says.

"The real job for me now is to critically assess whether there are enough things in the China bag of tricks to avoid a catastrophic outcome," said Walker during an interview in Beijing last week. "At the moment, I would say there are."

Walker, 58, predicted the yuan’s four-year climb would end a month before the currency peaked in January 2014. He’s also credited with foreseeing aspects of Asia’s financial crisis in the late 1990s and forecasting the U.S. subprime crisis.

Here are excerpts of the conversation:

Question: How’s China’s economy doing?

Answer: I can easily make the case for China’s growth rate being 3 or 4 percent, but to be quite honest I think most of the fund management industry around the world is there anyway and what they want to know is will it go to minus 4 percent?

Are we in an L-shaped phase of growth? Yes, I think so, but by the way that is absolutely normal after a boom phase which was pretty outlandish. Could growth go to 3 to 4 to 5 percent over the next two to three years? Yes, very likely. Will anybody in China really notice? Probably not. The economy doesn’t need to create that many jobs any more.

Question: Is a subprime crisis brewing in China?

Answer: One of the critical factors that China has going for it is that its savings rate is gigantic. When the Americans had a subprime crisis the overall savings rate in the economy was 17 percent and the household savings rate was closer to 3 percent. In China just now the household savings rate is probably in the mid to late 30s but the overall savings rate is still up there at 49 percent.

What it does provide is potentially a glide path to slower growth longer term, tackling problems that are enough to avoid a really catastrophic financial crisis or system crisis.

So many people are talking about China being about to embark on a subprime crisis of its own. When the U.S. ran into subprime problems, the banking system had a reserve requirement of precisely zero. China as we know has a reserve requirement of 17 percent for the big banks and I think it’s 15 percent for the smaller ones.

I had a look at the central bank’s balance sheet and sitting on the balance sheet from the banking system is 21 trillion renminbi in reserves. It looks to me as if there’s plenty in the gun just now that if the worst outcome were to present itself they would be able to do something about it.

Question: Are analysts right to be worried about risks in wealth management products?

Answer: There does seem to have been an upsurge in cross holdings of wealth management products within the financial system. I can’t hand on heart say that this looks like a big threat to the system. It could be, but it might not be whereas with the U.S. subprime stuff that was easy. It was purely based on housing prices and one of the biggest housing bubbles that we’ve ever seen and it was very easy to spot and that was just untenable.

Question: Are you worried about capital outflows?

Answer: Everybody has got very exercised about the rate of decline of foreign reserves. Yes, there’s some capital flight. But it’s a very strange country where if everybody is trying to get out M2 keeps going up.

Question: So how does it feel to perhaps be somewhat more optimistic than the market consensus on China?

Answer: As a perma-bear, I do feel a wee bit odd and I’m not comfortable. I’m starting to sound like one of the China cheerleaders and this is worrying me (Laughs). I’m anything but positive. I’m not cheerleading here at all. I’m worried about how much people have gone to the opposite extreme. The real danger at the moment is for the financial community consensus being too pessimistic. That’s an unusual position for me to be in.

— With assistance by Kevin Hamlin

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