Sat, Feb 10, 2018 - Page 9 News List

Outlook on China’s economy seems darkest from a distance

By Enda Curran and Ye Xie  /  Bloomberg

For all the talk of reform, the central government retains a firm grip on the economy. The heavy fist of the state still often trumps the invisible hand of markets, credit is still channeled from state-owned lenders to state-owned firms and local governments can still ramp up infrastructure investment at the first whiff of a slowdown.

That sort of investment rationale is behind one of Xi’s signature policy initiatives — the Belt and Road Initiative that Beijing has said would pump US$1.3 trillion into roads, ports and other construction projects designed to connect China to trading partners across Asia and into Europe.

While the state and local involvement is a plus for near-term stability, it could also be a tax on the future if capital is misallocated.

Banks are often identified as China’s weakest link. A deep-dive analysis by the IMF last year recommended that the nation’s lenders increase their capital buffers to protect against any sudden economic downturn.

Kevin Smith, Denver-based chief executive officer and founder of Crescat Capital LLC, said a banking implosion is inevitable — the only question is when.

Smith has held short yuan bets since at least 2014, a position that helped his global macro fund gain 16 percent in 2015 when the People’s bank of China surprised the world with its minidevaluation.

Smith was less fortunate last year when China’s economic recovery and tightening capital controls helped the yuan to rally. His fund lost 23 percent last year. The loss cut the fund’s annual return since its 2006 inception to 11 percent, which still outpaced the S&P 500 index’s gain of 8.8 percent during the period.

“We remain grounded in our analysis,” Smith said, undaunted. “Credit bubbles burst. Ponzis implode. In the end, we believe China will be forced to print trillions of US dollars equivalent of new money to recapitalize its banking system and bail out its depositors.”


In that scenario the currency would crash, Smith said, who is also short on various Chinese equities.

He was not alone in getting the yuan bet wrong last year. Consensus estimates at the start of last year forecast the dollar would buy 7.15 yuan (US$1.14 at the current exchange rate) by year-end — it ended at 6.50 yuan.

Headline economic data do not tell the story of trends and developments actually taking place on the ground, from the industrial northeast to the high-tech south and the agricultural interior, said Frederic Neumann, co-head of Asian economics research at HSBC Holdings PLC in Hong Kong.

The government’s firm hand on the tiller, he said, needs to be closely watched.

“The further away students of China are located, the more easily such nuances get lost, leaving many to focus more on the risks than on the promises of the country’s economic future,” Neumann said.

Because changes across China’s extensive economy tend to be subtle and gradual, it is often hard to get a feel for the pace of development, said Ji Mo (紀沫), Hong Kong-based chief economist for Asia ex-Japan at Amundi Asset Management, who called a bottom to China’s slowdown in late 2015, well before it was a consensus view.

She has been working for the past 13 years with Nobel laureate economist Joseph Stiglitz on analyzing China’s economy, having first met him when she studied under him for a doctorate at Columbia University.

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