Thursday, July 19, 2012

Ruchir Sharma: 10 reasons to believe in China slowdown story

Sharma, head of EM at Morgan Stanley, points out in this must-read article that China is now vulnerable to what he calls "middle-income deceleration," namely:
"China last year passed the $5,000 per-capita-income level, the same level (inflation-adjusted) at which all miracle economies - Japan, South Korea and Taiwan - slowed, generally by about four percentage points."

Another interesting observation is that China's fixed asset investment "hit an astonishing 50% of GDP - an unprecedented and unsustainable level for any major economy. China was spending more on infrastructure - pouring more concrete - than the US and Europe combined."

Sharma points out that China's wave of urbanizatiopn has largely run its course. To wit, "according to an early 2011 estimate from Capital Economics, there were only about 15 million people still underemployed in rural areas."

Demographics is another area of concern:
"Only five million Chinese will enter the core working ages of 35-54 this decade, down from 90 million during 2000-10."

Contrary to most analysst, Sharma believes that China also has a debt problem:
" ... the debt of households and corporations amounts to 130% of GDP - nearly 200% if the murky shadow banking sector is included."

"... In response to the crisis of 2008, China opened the credit tap so wide that there is now more money in circulation in China ($10 trillion) than in the US ($8 trillion)."

Finally, it is widely known that China is planning to shift to a consumption-based economy, but Sharma points out that "domestic consumption has been growing at an annual average of 9% for decades, which is a full percentage point faster than the average rate in Japan, and about the same as the rate in Taiwan, during their boom decades. Chinese consumption has been falling as a share of GDP only because investment has been growing even faster... The bottom line: if investment has to slow, and consumption can't grow much faster, then the overall economy has to downshift to a slower growth plane."

Read the full article: 10 reasons to believe in China slowdown story

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