Chinese investors are holding their collective breaths to see if the banking crisis predicted two years ago by renowned Chinese economist Li Zuojun will come to fruition in the next couple of months. Li's astounding accuracy in predicting China's economy has led to him earning the nickname "China's most successful doomsayer." Though far from perfect, a lot of what he said here rings true, but the interesting insight is that he forecasts that the incoming regime will want to take its lumps early, in 2013, so as to minimize blame ("it was the old crew’s fault") and maximize praise for subsequent recovery... He notes three other drivers (aside from this political one) including external flows and credit expansion and fears social instability should the status quo be maintained.
Housing prices will definitely take a dive, Li said, though it is not clear how far. It is possible that the new Chinese government, led by president Xi Jinping, could maintain tight controls to limit the drop to about 10%-20%, though Li did not rule out the possibility of a US-like collapse where property prices dropped by as much as 50% to nearly 100% in some cases.
Li noted that the bankruptcies of small and medium?sized companies, banks, and local governments are all signs of a nationwide economic crisis. Li gave four reasons for his prediction:
A bursting real estate bubble and the worsening local debt crises are two causes Li attributes to a potential economic meltdown.
He reasons that the overall economic downturn led to financial hardship for small and medium?sized companies, which subsequently resulted in reduced industrial and commercial tax revenues. Local governments suffered from reduced revenues due to the depressed real estate industry.
Nevertheless, local governments are under a lot of pressure to keep spending more money on items such as national defense, local infrastructure, housing construction and social insurance policies, improvement of hydraulic structures, and, most important of all, “maintaining social stability.”
At the same time, maturity of local debts is adding further pressure and forcing some local governments into bankruptcy. This will inevitably lead to banks also declaring bankruptcy, and debts being passed on to Chinese citizens. As a result, Li predicts a full?blown economic crisis is imminent.
China’s economy is slowing down while the United States is experiencing an economic recovery, therefore large sums of international hot money will flow out of China. This drain will also contribute to an economic implosion, he says.
China’s 2013 leadership transition brings new leaders to the helm that might not be so anxious to address China’s economic woes. Li thinks they won’t expose any of the past problems until three to five months after they take their positions. So, the most likely recognition of an economic collapse, according to Li’s estimation, is July or August of 2013.
“Following the economic bubble bursting, there will be a subsequent period of suffering. But for the new leaders, this is nothing bad, since they are not to blame for the suffering,” Li said. Furthermore, “With the economic bubble bursting, the new leadership can adopt practical approaches. … New political achievements will be gained more easily, since the starting point is comparatively low.”
The valleys of short?term, mid?term, and long?term cycles converge in 2013, Li said. A short?term cycle spans three or five years. Currently, this cycle is moving downwards and will reach bottom within the next two years, Li said.
A mid?term cycle spans about nine or ten years. According to Li, mid?term cycles in China ccurred almost every ten years, in 1949, 1957, 1966, 1976, 1989, and 1998. Li said it has been over a decade since 1998, and the cycle should be around the corner. Initially, this cycle should have arrived in 2008 or 2009. Economic policies at that time delayed the cycle’s valley, but it shouldn’t be delayed for too much longer, he said.
There is also a long?term cycle, which spans 60 years, Li said, giving his speech a traditional Chinese inflection with a reference to the I?Ching, also known as the Book of Changes, a classic Chinese text on divination. From Li’s estimation this cycle is also approaching. With the economic crisis, social problems will also result. The current intensification of “mass incidents,” or large, often violent protests, can be seen as a forewarning of future turbulence, he said.
The Challenge of Accumulating Economic Bubbles
Along with the rapid economic growth, economic bubbles have also accumulated. High housing prices are one good example of an economic bubble. High?priced assets represent another bubble. We no longer engage in manufacturing. Rather, we have all dived into the financial market, which in and of itself has created a bubble. Many industries suffer from serious overcapacity, another bubble. Many local governments have invested a great deal in development and spent heavily on financing, directly ?engaging in the business of land? and ?city management,? with low efficiency and with many ?repercussions,? which is likewise a bubble.
Many people are concerned that these bubbles will burst. If the government uses a superb macro?control technique, lets the air out of the bubbles little by little without triggering an economic crisis or social unrest, and timely cultivates new economic growth and new competitive advantages so that businesses are restructured and upgraded, this would be considered a ?soft landing,? and the bubbles would not burst. However, in 2013 there will be unprecedented pressure, which will warrant a high degree of vigilance and attention.
Li's Full China (and global) Outlook (via Google Translate) and press briefs:
(h/t Sean Corrigan of Diapason Commodities)