Is the China recovery real?

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By Leith van Onselen

Above is an interesting segment on CNBC’s Squawk Box discussing the latest Chinese economic data and whether the recovery underway is based on solid foundations. The segment features an interview with Patrick Chovanec, former Associate Professor at Tsinghua University’s School of Economics and Management in Beijing and Chief Strategist at Silvercrest Asset Management.

Below is the transcript of the interview with Chovanec:

Interviewer: What we’re focused on is what’s been happening with the recovery there. and recovery that looked like it was starting to kick in in October of last year. There were a lot of questions about that today. How secure do you feel with it?

Patrick Chovanec: A lot of what drove that rebound was the fact that the chinese were pumping in more money again. What was driving that was investment and China really still the fundamental dilemma that caused the downturn last year, which is that they’re too dependent on investment. they need to shift to more consumption driven growth. And the more they depend on investments, particularly investments that weren’t paying off, the more inflation, bad debt, overcapacity they were generating. And it eats up more and more of the credit that was necessary to drive further investment. It’s a vicious cycle.

Interviewer: It sounds like the leadership there may recognize this, at least when you start seeing some of the things they’re still talking about, what Eunice just mentioned, the opening of the railways. Is that acknowledge acknowledgement that we need to find more ways to come up with this growth?

Patrick Chovanec: There’s pretty wide recognition that we need to shift the growth models. But doing it is a little different than what we’ve seen. What we’ve seen in the last few years is the process to engage in economic adjustment. They know they need a correction, but they don’t want a correction.

Interviewer: We hear numbers out of china and tend to take them with a grain of salt from time to time. You hear a number like 7.5% that they were talking about, the growth thaey can look for and that was just last week when we were talking about these numbers. Is there an expectation that they will at least meet that number if not beat it?

China cross (Eunice Eune): Well, there is an expectation that they will probably meet it. Maybe not necessarily this year, but a lot of people do believe that the government, when it does lay out its five year plan, that it is going to basically more or less meet the target or beat the target because growth is important for the Chinese economy.

Interviewer: Now, I want to pick up on something else you guys were talking about when you’re saying that the government authorities are trying to recognize the – you know, the need for growth. One other thing that was interesting here was with the restructuring of the government, we really saw that they were targeting points of contention. area where – that have attracted a lot of public criticism like the railway ministry that have become big symbols of waste and corruption. And the food safety sales have been erupting here constantly and there has been a lot of criticism that something needed to change. And also what was interesting is the commission that manages the one child policy has been demoted and moved into the ministry of health. That’s suggesting to a lot of people that we are going to see change to the one-child policy, not only as a response to the people’s criticism of this policy, because a lot of them think that it’s unfair and horrific, but because economically speaking for China’s future growth, it needs to be able to continue to add people to its population in order to concede the workforce. With investors, there’s always a lot of caution about do we trust this, can we really invest in these places? How do you feel about it?

Patrick Chovanec: I think that’s true on a macro and a microlevel. I’ve always been questioning the data. I and a number of other analysts have said GDP growth was more around 5% or 4.5% last year. On a microlevel, there’s the question of do you believe numbers Chinese companies report about the performance and that’s been a huge issue in markets here.

Interviewer: We had Jim Chanos on the program last week. and he’s been very skeptical about China for some time. But he thinks that the property bubble at this point is reaching some dangerous levels. Do you worry about that, too?

Patrick Chovanec: You know, there is fundamental demand for housing in China because of urbanization and rising incomes. but that doesn’t mean that investors and builders haven’t gotten ahead of the market.We saw the 60 minutes piece with all of these empty cities. you have a lot of investors who have bought properties, empty properties and are holding them purely as investment. as long as they’re willing to hold them, that can persist for a long time. But as soon as they want to exit them, that creates a big overhang in the market. and then if you look at developers, developers have said over the past year that they’ve gotten rid of a lot of their inventories. but the reality is that the pipeline, if you compare the pipeline of under construction relative to the last 12 months sales, that ratio is at an all-time high. and, in fact, for office and retail, it’s nine years worth of sales under construction right now in china. that’s a huge overhang.

Interviewer: Yeah. that’s a daunting number. Patrick, thank you very much for coming in today and Eunice, thank you. we will talk to you again very soon.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.