There have been many allegations that China’s economy isn’t as rosy as the Chinese government would like you to believe. There are many sings of this; from Ghost cities built to boost GDP to the changing political climate they are experiencing. Recently Li Zoujun, an economist at the Development Research Centre of the State Council, released a report, presumably at an internal meeting, which predicted that China could face an economic crisis in 2013. (The full report in Chinese can be read here.) This obviously sparked our interest, as we’ve long been skeptical of the Chinese economy, and coming from a Chinese insider it was even more interesting.
Now we are not going attempt to summarize the whole report, as it is quite lengthy, what we will summarize is the more exciting portion of it the somewhat apocalyptic predictions. The majority of what he said does not seem very surprising. The only surprising thing about such a report is that it is made by someone from the State Council as opposed to a Westerners or Western media who were allegedly talking down China.
Li Zoujun says the causes of this economic crisis are, first of all, a burst of real estate bubble and local government debts crisis (sounds somewhat familiar and scary)
The second is external, namely that hot money and capital inflow over the past few years fuelled the bubble within China (then he blames “foreigners who short China” typical of a government sectioned report). As capital might flow the other way when the economy slows, it will cause troubles for Chinese government in dealing with it.
The third is political: as this year is pretty much the final year for the current government’s term, its job in the remaining months would be to hope that everything is stable. But let’s say the economy get pass the leadership transition without any troubles, the next leadership will face two choices: either to sustain the bubble for now and create a bigger problem in 2015 /16, or let the bubble got bust. Of which, he endorses the second choice.
Finally, business cycle short wave and long-wave troughs could meet very soon He believes that a crisis should have occurred in 2008/09, yet the massive stimulus delayed that, and it is about time that it can no longer be delayed.
In the coming crisis, he believes some local governments, small and medium sized business and some banks will go bankrupt.
For those who have been reading the Stocktouch blog for a while hopefully this idea isn’t new to you. We have spent quite a lot of time focusing on local government debts, shadow banking mess and real estate bubbles. We have also said many times now that capital outflow will prove to be very problematic for China. Many of the problems predicted here has been mentioned, and indeed some are already happening, such as defaults and the credit crunch among SME caused by mutual guarantees scheme, while some local government debts are being rolled over to delay the day of reckoning.
The only surprise, as we said, is that this is someone within the State Council who said it. This adds evidence to our judgment that the massive stimulus in 2009 is widely viewed as a mistake within China, and some within the government’s policymaking bodies share that view, and we believe this is one of the reasons why the government is so far reluctant to provide any massive stimulus despite arguably very grim economic outlook.