The most tantalizing economic question in Asia is which nations are most at risk of a Japan-like lost decade.
South Korea, beset in recent years by political paralysis, often tops the list. Thailand’s inward turn under the military junta that’s run the place since 2014 comes up, as does a Malaysia under the leadership of scandal-plagued leader more focused on survival than reform.
And it’s not clear, let’s be frank, that Tokyo has internalized the lessons from its perma-funk. But nothing sends shudders down investors’ spines like the idea of China falling into a deflationary debt trap.
To be sure, investors haven’t gotten rich from the China-crash trade.
From Gordon Chang’s 2001 “The Coming Collapse of China” book to short-seller Kyle Bass of Hayman Capital Management warning nowadays that we may be approaching point where “hell breaks loose,” Beijing has a knack for confounding the bears.
But what if Xi Jinping’s ability to beat the laws of economic gravity has run its course?
But what if Xi Jinping’s ability to beat the laws of economic gravity has run its course?
That’s the gist of a new report from Nomura’s Rob Subbaraman and Michael Loo. The analysts warn that China and Hong Kong top the list of economies most at risk of a financial crisis over the next 12 quarters.
The problem? A reform big bang that’s more rhetorical than substantive and slow progress reining in the excesses of Beijing’s state-owned enterprises.
“Whether China is willing to tolerate some short-term pain for long-term gain, by persevering with deleveraging, closing zombie companies and letting markets play a more decisive role, remains to be seen,” Subbaraman and Loo argue.
“The one thing that is clear is that the longer China delays, the bigger the risk of disruptive adjustments from which the contagion to the rest of Asia could be substantial.”
Talk about an understatement. Even if China manages to eke out 5%-plus growth between now and 2020, internal dynamics are likely to disappoint the Janet Yellen’s and Mario Draghi’s of the world.
As inflation in the US, Europe and, of course, Japan disappoints, there’s been hope China would fill the pricing-power void. Hardly, as consumer price rose just 1.5% in June. Given the margin of error for inflation gauges in developing economies it could be much lower than that.
What matters is the trajectory. As China’s overcapacity woes grow -– and spill over into the global economy — so does its negative influence on price levels.
What matters is the trajectory. As China’s overcapacity woes grow -– and spill over into the global economy — so does its negative influence on price levels.
Nomura’s warning comes the same week Standard & Poor’s pointed out that Xi’s team is facing “significant obstacles” in curbing runaway credit growth and getting a handle on financial risks.
S&P’s key concern is this: commitments to deleverage are no match for Beijing’s roughly 6.5% growth imperative.
Credit is expanding apace, in direct contradiction with Beijing’s pledges to cap it, as Xi’s team supports state-owned enterprises and local governments facing weakening demand.
That’s the same mistake, remember, that Southeast Asia made before 1997, putting rapid growth before retooling economies.
In many ways, Xi’s problem is more political than financial. That 6.5% is the source of the Communist Party’s legitimacy with 1.4 billion mainlanders.
Any sweeping effort to replace exports and smokestack industries with services would require greater tolerance for less gross domestic product.
It requires Xi tolerating the ire of party bigwigs profiting greatly off the status quo. In other words, courage to take on the political status quo must front-run big efforts to recalibrate growth engines.
All this foot-dragging is imperiling Hong Kong, too.
Twenty years after the handover, it’s clear hopes Hong Kong would change China didn’t pan out.
Rather, Beijing is remaking Hong Kong in its image. It also, however, has increased linkages to the city in ways that raise Hong Kong’s risk profile -– including stock-connect schemes and mainland cash pushing apartment prices away from most Hong Kongers.
As China’s fragilities imperil Asia, Hong Kong is directly in harm’s way. Interesting to think that rather than discovering and emulating Hong Kong’s winning free-market model, China risks getting lost.
What do you expect、 The IMF is dominated by the US/and their banks. You would be naive if you think they’ll look after your interests. Look at what happens to Greece!
First of all, we need to know the reason for Japan’s lost decade. The reason is that Japan is not a sovereign country. It is an occupied territory. It is occupied by American soldiers. And the master, the USA, could not allow Japan to become richer and economically more advanced than the USA. So, USA forced Japan to appreciate the Japanese Yen to a point that rendered Japanese export products very uncompetitive. This then led to economic stagnation/ decline of the Japanese economy, hence the lost decade.
USA can repeat the same thing with South Korea, which is also occupied by American soldiers. But USA cannot do the same thing with China, Vietnam, Malaysia, Thailand, etc. Because these countries are not occupied by American soldiers. They are not vassal states of the USA.
Fair points Mr Wong, but the difference between the US and China is that the former possesses the self-healing mechanisms for surviving and repairing its often egregious errors while the latter does not.
Gavin Greenwood,
You get it all wrong. China is an eternal country. It has always existed and it will always exist. From an economic, social, technological and scientific point of view, China had been at the top of the World many times before since more than two thousand years ago. Foreign invasions brought it down several times, but it bounced back to even greater vigour. The last invasion of China was carried out by the Manchus followed by the European and American countries. These successive invasions dragged down China, but since 1949, Chinese was unified again and 1978 marked the beginning of the economic and technological recovery of China. This recovery is still underway and will take China to the top of the World. China will then remain at the top for several centuries until a new foreign invasion will bring it down temporarily.
On the other hand, USA is a transient power, much like Mongolia in 1200 or like the Manchus in 1650. Soon USA will lose all its powers and even a great part of its territory like Mogolia and Manchuria lost the greater part of their territories. In the case of the Manchus, their country is now blended into China. May be, some time in the future, what we now call USA will be part of greater China and will be ruled from Beijing.
Michael Chan , hope u won’t undermine growing power of India under leadership of nationalist Prime Minister Mr.Narendra Modi, biggest challenge to China is to keep good relations with India if they want to have bigger role in world politics and business .
Together these countries can reform the world to be a better planet to live.
China is doing very well ..and as I think China should not believe on the Western style development model and should not take resort to market driving forces.China should follow the Chinese model as it is doing now if China wants to make a solid progress in future.
I rather think that Kashmir will we’re in Pakistan.
Michael Chan Garu, Shortly Pakistan will merge in INDIA because Pakistan suffer by poverty and there is no Government and lot of thanks for being with me
There is an important difference. China is a soverign nations while Hong Kong is self governing. Japan is a US vassal and occupied by American military bases. It was doing very well until forced to transfer its wealth to USA via various devious means like idiotic currency manipulations..