China’s red-hot economy is in no danger of an impending collapse despite warnings that the debt-fuelled bubble in the nation’s property market is close to bursting, says Jing Ulrich, JPMorgan’s managing director and chairman of China Equities and Commodities and a speaker at the Reporting New Realities media conference held recently in Hong Kong.
Responding to a question at the conference about what keeps her awake at night about China’s economy, Jing says she feels a need to “debunk the myths” about an impending collapse of China’s economy. These “myths” include suggestions that China’s fiscal position may be exponentially worse than Dubai’s and that local government debt levels are too high.
“I do think there are some areas of potential concern, such as in the high-end real estate market. There are some areas where we are experiencing over-capacity such as the steel industry and the aluminum industry,” says Ulrich.
“All these areas are worth monitoring very closely. But those people who are suggesting China is up for its economic reckoning are way off the mark.”
Two weeks ago, the Shanghai Composite Index entered a bear market, falling more than 20 per cent from a November peak amid concerns that Beijing’s efforts to curb inflation by tightening monetary policy will hurt earnings.
In early May, investor Marc Faber, the publisher of the Gloom, Boom & Doom report, warned that China’s economy will slow and possibly crash in the next nine to 12 months, noting that declining stock and commodity prices signal that the bubble in the property market is set to burst.
Other naysayers about China’s economy include billionaire investor Jim Chanos and Harvard University professor Kenneth Rogoff, a former chief economist at the International Monetary Fund. Both have also been warning of an economic crash in China. They point to the government’s rollout of a massive RMB4 trillion (US$586 billion) economic stimulus package in late 2008 amid the global financial crisis, which helped fuel the speculatory bubble in China’s property market. Chanos noted that as much as 60 per cent of China’s gross domestic product is dependent on construction.
Other fears include rampant overcapacity in China’s various economic sectors, which could leave the Chinese with vast quantities of goods and products that they will be unable to sell.
Last year, Chinese banks issued loans of an unprecedented RMB9.59 trillion (US$1.4 trillion), helping the world’s third-largest economy recover from the aftermath of the crisis.
In her analysis of China’s economy, JPMorgan’s Ulrich says there are three key economic shifts. First, Beijing has moved to a more neutral monetary policy after adopting an ultra expansionary one in 2009 due to the crisis. For instance, the government has moved to reduce lending by banks and adopt other tightening measures such as a possible interest rate hike in the second or third quarter of this year, as well as allowing the renminbi to appreciate against the US dollar in the coming months, says Ulrich.
To be sure, Beijing’s monetary tightening is aimed at controlling inflation, prevent the deterioration of the asset quality of the banking system and avoid the build-up of overcapacity in the industry, says Ulrich.
Second, Beijing is shifting away from its highly supportive policy towards the real estate sector in a bid to rein in asset price inflation and asset bubbles. Towards that end, the government this year introduced more restrictive down payment requirements, higher mortgage rates, a ban on lending for third-home purchases, and increased scrutiny of developers’ financing. Ulrich notes that after these measures were implemented, property transaction volumes fell by between 20 and 30 per cent.
“I think that it’s important that the government actually acts aggressively in this instance because if they didn’t do anything, if they let property prices running away, I think the ramifications could be very negative,” says Ulrich.
Lastly, Beijing is intent on shifting away from state-driven investments towards more private sector consumption. Ulrich says that with China’s economy having stabilised in the wake of the global financial crisis, the government recognises the need to focus on private consumption to prevent private sector investments from being crowded out by public sector investments.
Beijing has thus disbursed about RMB45 billion to rural residents for them to trade in their old appliances and vehicles, and reduced taxes on smaller-sized vehicles five per cent from 10. And to relieve the pressure on the middle class, Beijing will spend US$123 billion in the next two years to provide basic healthcare services to 90 per cent of the Chinese people, and aims to achieve universal healthcare by 2020, says Ulrich.
“If people have pension services, healthcare and education services provided for, they can then feel a lot more confident to spend their savings rather than keeping all that money in the bank for a rainy day,” says Ulrich. “So I think this is one of the most encouraging trends we will see in the coming few months and the coming years.”
Another possible trend is that China will become more inward-looking over the next decade, says Jin Canrong, professor and associate dean of the School of International Studies at Renmin University of China.
Speaking to INSEAD Knowledge on the sidelines of the conference, Jin explains that he thinks China will be inward-looking because its leaders will always view the country’s domestic challenges as their top priority. But he acknowledges that China also has a dual-identity in that it has a major role to play in the international community.
Jin adds that from a strategic standpoint, China is very satisfied with the status quo in the world and that Beijing is unwilling for change to occur, even if the US wants to pursue change. But from a tactical standpoint, Jin believes that China will become more active in protecting its interests overseas, particularly in strengthening its navy to protect shipping lanes.
Asked about his view that the world will be disappointed if it expects China to shoulder more responsibility internationally, Jin says there is a gap between the perceptions of foreigners about China’s capability and the reality.
“I think that the real case is that China will take more responsibility because China is fully aware that power means responsibility,” says Jin. “With more power China gets, China should have more responsibility. But China tries to keep the balance between the capability and the responsibility. China will resist the part beyond its capability.”