Roubini calls time on China (part 2)

Earlier this month, Houses and Holes posted a report from Professor Nouriel Roubini warning that the Chinese economy is overheating and risks a sharp slowdown sometime after 2013.

Now Professor Roubini has followed up with an article on Project Syndicate fleshing-out his views in greater detail. Professor Roubini  more or less supports earlier warnings from Michael Pettis and prominent China bears: Jim Chanos, Vitaliy Katenelson, Gary ShillingPuru Saxeena and Andy Xie.

Below are the key extracts from Professor Roubini’s Project Syndicate article.

China’s economy is overheating now, but, over time, its current 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… 

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.

Thus, China did not suffer a severe recession – as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 – only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging…

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption…

Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies. A weak currency reduces household purchasing power by making imports expensive, thereby protecting import-competing SOEs and boosting exporters’ profits.

Low interest rates on deposits and low lending rates for firms and developers mean that the household sector’s massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative. This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market-equilibrium interest rates…

To ease the constraints on household income, China needs more rapid exchange-rate appreciation, liberalization of interest rates, and a much sharper increase in wage growth…

Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate, and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. Until the change of political leadership in 2012-2013, China’s policymakers may be able to maintain high growth rates, but at a very high foreseeable cost.

Cheers Leith

[email protected]

Unconventional Economist


  1. “- most likely after 2013 – China is poised for a sharp slowdown… ”

    Very useful. So the slow down could be in a 100 years time – or even later.
    I predict the end of planet Earth – most likely after 2013.

  2. You left my anti-hero Hugh Hendry off the list – he’s been wrong since 2009.

    Marc Faber was wrong in 1998 – he called the top of the NASDAQ bubble two years early. He also called the Japanese bubble too early.

    Steve Keen is also in the wrong crowd – still wrong after 3 years on the Australian housing bubble call.

    But you know what?

    It doesn’t matter how many times you are right or wrong: its how much you make when you are right, and how much you don’t lose when you are wrong.

    How much did those who gambled/invested in the NASDAQ and Japanese bubbles at the top lose compared to Faber et al who sat on the sidelines and waited?

    How much has Keen lost in 3 years by selling his apartment and investing the remainder in cash?

    How much has any Melbournian got to lose by buying a house/unit RIGHT NOW?

    Many economists and other uneducated spectators (but I repeat myself) like to point out the flaws in anyone or man’s calls or actions, and point to failed timely predictions as failures in analysis.

    These same people had no idea about the GFC until it hit them.

    • “How much has any Melbournian got to lose by buying a house/unit RIGHT NOW?”

      Thats the scary part, and normally I couldnt care less for any idiot that bought into the bubble – however close friends of ours recently have with the view to renovate and flip for profit!

      A shame that they couldnt see the writing on the wall. I had long ago given up trying to argue and convince people otherwise – especially family.

      The pain that others will suffer will be bitter-sweet vindication that we were right all along in arguing the case with complete thicko’s.

    • seen it coming

      The Brisbane house I sold around the same time Steve Keen( acknowledged GFC foreteller btw) sold his in 08 has been back on the market for 4 months. The “agent”! I sold it to is asking 11% more than I received 3 years ago, but allowing for stamp duty,interest,minor visible improvements and other costs it would seem that she would be lucky to break even. Thats if she sells it. I made 25% pa 3 years running prior to sale. An ex work mate has had his classic Queenslander for sale for 6 months and no sale despite reducing asking price by over 15%.It sits vacant. I am glad to have left that particular market( have debt free rural block now)and people like Dr Keen helped me realise actual profits because timing as you say is everything. And btw, I also switched my super to cash in 08 and took no losses in the GFC, only rises. I guess I could have my head in the sand like you and others but where is the profit in that? Or are you just another property bull desperately trying to protect their stranded and illiquid assets?

      • I think you may have misinterpreted the Prince’s post – he is not a property bull, he is no critical of the folk he mentions, they are rhetorical questions.

    • Prince,

      The only reason why Steven Keen got it wrong was because the Aussie govt propped the market back with FHOG and stimulus. Otherwise he would have gotten it correct. As he has been saying Austrlaia will face the music sooner or later.

      Hugh Hendry and Jim Chanos might not have the timing right but lets face it they must be doing something right as they are multi-millionaires making money off their predictions. They must be predicting something right otherwise they wouldnt have all that money. Plus if they predicted everything wrong do you think the media would pay so much attention to them.

      • “The only reason why Steven Keen got it wrong was because the Aussie govt propped the market back with FHOG and stimulus. Otherwise he would have gotten it correct. ”

        Keen made his bet with Rory AFTER the FHOG boost was announced and AFTER the RBA began slashing rates. Keen predicted the OCR would go to ZERO but it wouldn’t stop the crash. Overall, Keen overestimated the Gov/RBA reaction.

      • Sarah, I think Steve Keen even signed a letter along with other economist saying the government stimulus program (including FHOB) was the right response to the GFC.
        BUT, You have to accept that, at the time the bet was made, nobody could have forseen that FHOB could have such a profound effect on house prices. Hindsight is such a nice thing.

        • All i have to say is if you follow Steve Keen’s advice, then you’d have to scratch your head and ask yourself why??

  3. Inflation in China is spiking now and measures to control credit are being implemented now rather than later.

    Possible for China to have credit and asset bust in 2012 rather than 2013.

  4. Reading opinions that run counter to the almost entirely one way ‘contrarian’ traffic on this site is a welcome change. Mocking or insulting posts degrade the atmosphere of this otherwise wonderful blog. Sarah P, your side swipes at the soft spots of the arguments is appreciated, even if you are Adam Carr. The ethos of this site, as I see it at least, involves rejection of complacent thinking and embracing rigorous analysis of the evidence. That objective must permit a range of views, and constant challenge to orthodoxy. Otherwise you’re just a sheep in wolf’s clothing.

    • I have welcomed Sarah P’s contributions in the past. I like to hear alternative views. I like reading Adam Carr and Chris Joye. I’m just wondering whether Sarah and Adam are the same person.

    • Commentary that totally misses the point and adds nothing to the discussion is likely to get shot down in this forum – this is not kindergarden after all (or worse – the MSM).

      I do not visit this site for a range of views, merely for the sake of variety – I am only interested in views supported by evidence and responses that address the pith of the argument.

  5. I’m no china/aussie housing bull or bear, all I do is read the facts and stories that people produce from both sides. Logic and statistics seem to be very much on the side of the bears, so that’s the view i’m taking. Still, convincing my pregnant wife that we shouldn’t spend 1 mil + on a 3 bed house in the lower north shore is another issue altogether.

  6. Cheerleaders and naysayers both suffer confirmation bias. The contrary view to one’s own offers the opportunity to reflect critically on what you hold to be true. Don’t kid yourself that your side has a mortgage on reason. (Not directed at The Lorax).

  7. soft and hard commodities are near 50 year records. baltic dry index is as low as when lehman collapsed. credit growth in china is around 4x GDP. i think we all know how this ends. can someone sell me some cheap CBA puts please?

  8. China unlike Ireland, Greece, New Zealand, America, Philippines, and Australia has massive accumulated ‘national savings’ in the form of foreign reserves, through their trade with the likes of us. Australia, the USA, etc have massive CAD’s instead!

    China’s standing army of one million is a black hole investment, if ever there was one – But with their economy they could probably cope with doubling it! Infrastructure standing around waiting to be used, doesn’t rate by comparison. Dr Roubini seems to be expressing the miserable wishful thinking of many IMF oriented economists.

    Just consider all that so called ‘earnings’ from the mighty Western Australian ore export effort to China that has to be balanced by cheap imports. Australia gets absolutely no benefit in the form of national savings (foreign reserves). Our exchange rate system prevents that. We just get more Australian businesses going bust, and jobs lost!

    Leigh Harkness’s letter about the ‘salary ceiling’ in respect of the ‘two speed economy’ offers considerable insight in this regard. It was read by Ian McNamara, ‘Australia All Over’, ABC radio, Sunday 7.29.43a.m. on 17 April 2011. ‘Macca’ couldn’t help but comment: “This is a good little analogy!”. You can hear for yourself at – Last Week’s Show 7-8am .

  9. The Philippines example in my first paragraph was included in error. They don’t have a problem these days re CAD!

    As the Leigh Harkness points out: “the Philippines has moved away from a strict application of the floating exchange rate system. It now builds up official foreign reserves and since 2003 has had current account surpluses.”