Is Winter Coming for China's Economy?

Amid tumbling real estate prices, credit woes in Wenzhou, and data released yesterday showing that China’s factory sector shrank the most in 32 months in November, Tsinghua University business professor Patrick Chovanec details comments he made on a “bulls vs. bears” panel at last week’s The Economist China Summit in Beijing:

The main theme of my comments were “Winter is Coming.”  The phrase, as I explained, is a reference to the popular HBO TV series Game of Thrones (and the novels by George R.R. Martin), which depicts a medieval fantasy world in which summers and winters last for many, many years, alternating not over the course of a single year, but a lifetime.  After so many years of summer, many people begin to doubt whether winter will ever return, or remember what it is like.  One family, whose task is to guard the North, have a watchword:  “Winter is Coming.”  It serves as a warning, and a reminder, to be prepared for difficult times ahead — and in China’s case, that the current drivers of growth are unsustainable and a correction is coming (and, by the looks of it, is already underway).  I had already planned to introduce this theme when, a few days before the panel, I happened to come across this New York Times article on China’s real estate downturn, which concludes with a quote that capture this idea exactly:

But the real estate downturn has only just begun, Mr. Zhang said, adding, “We are on the cusp of winter, and we don’t know who will survive it and who will not.”

See also a summary of last week’s panel in Beijing, courtesy of Dezan Shira & Associates.

As bearish signals continue to surface, as evidenced by the outlook of billionaire short-seller Jim Chanos, one of the biggest investment funds in the world is not sold on a hard landing for the Chinese economy. From Forbes:

“While there are undoubtedly some significant risks to growth brewing in China’s economy, such as with: local government funding vehicle debt levels, a credit growth slowdown, the possibility of a property price bubble, and the negative impacts on exports from developed world troubles, but a hard economic landing — or severe financial crisis– in China is not our base case,” BlackRock Investment Institute said in a report last month. The Institute provides intelligent reports for BlackRock fund managers and high net worth clients.

China’s strong fiscal situation and implicit government support for the banking system, provide ample cover from a hard landing.

BlackRock economists said there was a very low likelihood of economic hard landing in at least the next 6 to 12 months.  “We believe that inflation — while perhaps understated by official statistics — has likely peaked in China, and should trend down to more manageable levels.” Inflation fell below 6% this month, its lowest level on the year.  Inflation in China is the lowest of all the big emerging markets.

Investor Jim Rogers shares BlackRock’s optimism, telling CNBC that China is slowing down because it wants to slow down and that its debt problems do not compare with the United States. From the interview (via Business Insider):

“China is the largest creditor nation in the world. America is the largest debtor nation in the history of the world. I’d rather be with the creditors than with the debtors any day.”


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