Belmont Club

The cloudy crystal ball

Ambrose Evans Pritchard argues in a Telegraph article that China may be in serious economic trouble, citing a widening gap between production and consumption that is creating excess capacity.  On the one hand, sales are falling, with exports down 23% from a year ago. On the other hand, output is rising as a result of  “an investment blitz in roads, railways, and industry through state-owned companies”. The result is one trend line going up and another trend line going down.

the stimulus is feeding more industrial investment, leading to more excess capacity worldwide. While Chinese GDP continues to grow near 8pc, this is based on output. In the West, GDP growth is based on spending. These two definitions are chalk and cheese. … There is a deeply-rooted belief that the authorities can keep the game going – the “Panda put” … Mr Xie, who wrote his doctoral thesis on Japan’s bubble in the 1980s, said China’s ratio of property prices to incomes is seven times higher than in the US. It costs three months’ salary per square meter of space – arguably the highest in the world – though tower blocks are sitting empty. Prices are being propped up by state enterprises, abetted by local Communist bosses.

The Australian echoes many of Pritchard’s fears. Michael Sainsbury, its China correspondent, warns a property crash may be in the offing, as the central government its stimulus package, “a rubbery number generally quoted at 4 trillion yuan ($702bn) but believed to be much more” pushes things up with no visible means of support. The Australian Treasury Secretary, Ken Henry, warned of a “second shockwave”, but believed it would not be as bad as the first. Sainsbury writes:

The property bubble in the Western world, an overvaluation of assets driven by cheap money and dodgy financial engineering models, was at the very heart of the nasty global recession that appears to be edging away from the abyss. The big question on everyone’s lips is whether China is heading down the same path and if it is, like the property crash in the US, its effects will not be limited to China.

But not everyone thinks doom is just around the corner. The Fed suggested that while the economy may remain weak for a time, the worst of the recession is over. “While US unemployment rose again last month, the 247,000 job cuts were far fewer than analysts had expected.”  A Wall Street Journal poll reported that economists surveyed believed it had indeed run its course. “The Journal reports that the experts are overwhelmingly in favor of President Obama asking Bernanke to stay on for another four-year term when his current term ends Jan. 31.”

Japan recorded its first quarter of growth for more than a year, leading to hopes that the recession is ending across the globe. “The figures appear to bear out prime minister Taro Aso’s assurance that Japan would be among the first major economies to emerge from the global recession … experts warned, however, that the recovery could quickly fizzle out without improvements in demand at home, where families have been spooked out of spending by falling wages and job fears.” Is recovery around the corner? Open thread.

Tip Jar or Subscribe for $5