Stephen Roach, former Chairman of Morgan Stanley Asia, wrote a piece asserting that China is OK and will not suffer a hard landing. He cites three reasons:
- The slowdown in China’s GDP growth (in absolute magnitude) was much more pronounced in 2008 — GDP growth decelerated by 8.2 percentage points in 2008 but by only 4.3 percentage points recently [peak GDP growth was 11.9% in Q1 2010 and slowed to 7.6% in Q2 2012].
- China’s “urban population should expand by more than 300 million by 2030 – an increment almost equal to the current population of the United States. With rural-to-urban migration averaging 15 to 20 million people per year, today’s so-called ghost cities quickly become tomorrow’s thriving metropolitan areas.” This will absorb the excess inventory.
- The economic shock of 2008 was a wake-up call, and China’s construction phase is a well-construed action plan.
I don’t find these arguments compelling. It might be true that these factors will support a healthy long-term (multi-year or decade long) economic picture. However, this does not recognize the temporary destructive impact that over capacity can have. If a builder takes a loan to build a new housing development, that builder will owe interest payments. Anticipated demand several years in the future does not help the builder with cash flow as multiple developers are trying to unload their property. [In the very long term (20-30 years) I have grave concerns about the demographics of China when an aging population that will be consuming resources will need to be supported by a shrinking productive population, a result of China’s one-child-per-family policy.]
While I am not persuaded by Mr Roach’s piece, it is imperative to understand different points of view, especially when they run contrary to my own. It is for this reason that I pointed to Mr Roach’s piece: to consider the possibility that China will be fine, especially because I posted concerning content on China in some earlier blog posts here and here.
source: Project Syndicate: China is Okay