Canberra please read: Roubini calls time on China

From Nouriel Roubini at RGE Monitor:

I’m writing on the heels of two trips to China during which I met with senior policy makers, bank executives and academics, just as the government launched its 12th Five-Year Plan, intended to rebalance the long-term growth model. My meetings deepened my own impression and RGE’s long-standing house view of a potentially destabilizing contradiction between short- and medium-term economic performance: The economy is overheating here and now, but I’m convinced that in the medium term China’s overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible—most likely after 2013—China is poised for a sharp slowdown. Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate and infrastructure. I think this dichotomy between the high-growth/inflation pressures of the next couple of years and growth hitting a brick wall in the second half of the quinquennium is far more important than the current focus on a “soft landing” amid double-digit growth. A number of local scholars close to policy circles agree that this is the biggest challenge of the next few years, as we’ve been saying for months.

  • Despite policy rhetoric about raising the consumption share in GDP, the path of least resistance is the status quo. The details of the new plan reveal continued reliance on investment, including public housing, to support growth, rather than a tax overhaul, substantial fiscal transfers, liberalization of the household registration system or an easing of financial repression.
  • No country can be productive enough to take 50% of GDP and reinvest it into new capital stock without eventually facing massive overcapacity and a staggering nonperforming loan problem. Most likely after 2013, China will suffer a hard landing. China needs to save less, reduce fixed investment, cut net exports as a share of GDP and boost consumption as a share of GDP.
  • China is rife with overinvestment in physical capital, infrastructure and property. To a visitor, this is evident in brand-new empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, massive new government buildings, ghost towns and brand new aluminum smelters kept closed to prevent global prices from plunging.
  • It will take two decades of reforms to change the incentive to overinvest. Traditional explanations of the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle—the rest is the household sector’s sub-50% share of GDP.
  • Several Chinese policies have led to a massive transfer of income from politically weak households to the politically powerful corporates: a weak currency makes imports expensive, low interest rates on deposits and low lending rates for corporates and developers amount to a tax on savings and labor repression has caused wages to grow much less than productivity.
  • To ease this repression of household income, China would need a more rapid appreciation of the exchange rate, a liberalization of interest rates and a much sharper increase in wage growth. More importantly, China would need to privatize its state-owned enterprises so that their profits become income for households and/or massively tax SOEs’ profits and then transfer those fiscal resources to the household sector.

These are my observations and interpretations from the ground.

Houses and Holes


  1. be wary of lopsided trades –
    go long the USD – short the AUD

    counter trend is your friend

  2. I can almost hear a bureaucrat somewhere go “Listen to Dr Doom?? pffft”
    You see, Canberra only listens to Canberra economists and a few bank economists.
    And they have reached a consensus – No worries mate, its all good for the next 20 years.

  3. I doubt anyone in Canberra takes Roubini seriously. If anything, this will be seen as proof that the China boom will last forever.

    • A pitty that the powers that be only listen to advisors with vested interests and fanciful outlooks.

  4. I’ve said before in regard to mining company development activity in Western Australia – whilst there is the huge projected spend on infrastructure mooted – comparatively moderate activity is happening on the ground. That’s not to say it’s not crazy in the Pilbara – it is. Existing facilities are being utilised (albeit with commensurate major maintenance work) to maximum capacity but new projects are excruciatingly slow to get going. I have long believed that the miners are milking the boom for all it’s worth, but cautious (with good reason) when it comes to actually commencing new projects costing billions of dollars with production not due to come on-line for some years. They are well aware that we are in uncertain times. And I don’t doubt they have a better feel for it than the bureaucrats. 2013/14? Better make hay while the sun shines.

    • But, but … I thought we were all suffering higher-than-necessary interest rates to offset the inflationary effects of the biggest mining investment boom ever.

      Now you tell me these new projects aren’t happening?!

      • Simply saying that the new projects are very slow to get going and the really big ones – no not happening yet. Still – huge infrastructure investment in existing plant – if you visit the Pilbara you will see the scale of that alone. It is just my gut feeling that at some level there is delay occurring…

        • ABC radio news this morning announced Western Australia was in technical recession for the 6 months to December.

  5. I don’t want to be disrespectful, however Mr Nouriel Roubini do not understand Chinese capitalism : there is no such thing as ‘private enterprise’ in China. The CEO of every listed company in China is answerable to the Politburo. Notions of profit and loss is meaningless, and there is no distinction between investment and consumption. There are no ‘politically powerful’ corporation, only corporations owned by politically powerful people.

    The Chinese Government is the ‘parent company’ of everything in China, with the 9 person in the Politburo as the only shareholders. It is a very different system.

    • Because they have a different system doesn’t mean they are immune to market mechanism… The market is simply dictated by human nature.

      Look at the Soviet Union… different system as well but basic economics still caught up.

      • The Chinese system is based off ‘Japan Inc.’ which delivered spectacular growth for Japan from the 1950s to the 1980s. It is not a command economy, however every single company must obey an ‘imperil edict’ when it is announced. The big question facing China is whether absolute political control can co-exist with a market economy. As long as the Chinese political system holds, China can build empty apartments and roads to nowhere for a long, long time.

        • Dave From Pakenham

          Unfortunately it is nothing like the Japanese system, everything the Japanese did for 4 decades had an economic return, lets ignore what they did with those profits. Nothing China has done for the last 2 decades had an economic return.

    • what amazes me every time is the fact that neolib capitalists who think only invisible hand of the market is able to successfully allocate resources and capital, claim that China will do good because Chinese Politburo is better than invisible hand of the market

  6. The Australian govt better wake up. That band aid that China and the Aussie govt put on their economies is starting to come off. When it does the wound is going to be worse than what it was before.

  7. The best comment I have seen on China is that “it is big”. It’s “best” because it is about as definitive as you can get with any accuracy. If you fancy a heavy read try and get hold of ‘Inside China’s Growth Engine” published by HSBC last December – you should be able to download it. Interesting if nothing else. Once China is no longer flavour of the month maybe everyone will start fixating on India. For example their projected requirements for coal over the next few years are enormous.

    • Flick through bits here and there, skim read some parts, read other parts. That article is vast. Can’t download it though, link;

      I think its funny how here in Australia we say how good our economy is, cause we have China, and the world isn’t doing so well cause they don’t have China like we do (pub talk). Well China’s top three trading partners are; E.U., U.S., and Japan, and they’re even running a trade deficit with Japan.

      Can only say China, the mysterious place in the East. Tonnes of work went into that article, amazing!

      • You need to down load a program called doPDF7. You can use this to convert the “scribd” article to a pdf – use the print command but print to a file. The PDF is 237 pages, – I hit print and walked away for a couple of hours, it took a while.

  8. I have to agree with some of the comments above re: Western Australia. I live in Perth and while I hear talk about the Mining Boom Mk2, I’m just not feeling it.

    BHP and Rio are continuing to invest billions in added capacity, and other existing construction projects are continuing, and/or winding down, as per normal.

    However the it is the really big projects such as FMG’s Solomon Hub project, Chevron’s Wheatstone and Browse projects, and the opening up of the Mid West (for which the as yet unbuilt Oakajee Port is expected to be the catalyst), which are really expected to provide the quantum leap for the mining boom. However many of these projects are not expected to get full approvals till this year or early 2012, or are still at preliminary stages.

    As a result the industry is not having the same impact as it was here in the period 2003-08.