China's Economy Is Stuck on the Runway

Excerpts from Dr. Enzio von Pfeil's November 26, 2008 appearance on CNBC Asia Cash Flow:

If America's executives are leaving on private jets (See: America's Economy: Leaving on a Jet Plane), China's leaders are stuck on the runway...

1. The World Bank estimated that China's GDP is likely to slow to 7.5% in 2009. What are your thoughts on this? What else can the Chinese government do to re-balance its economy?
   • I wonder why we are paying the World Bank at all. Like the IMF and other supra national organizations, its “insights” are always a year out of date and cost the tax payer a fortune to finance these overpaid economists who add little, if any value.
   • Anyone could have told you that China must keep slowing: her Economic Time has been worsening for two whole years!
   • The statistical sophistry of “7.5%” is incredulous: sounds like a political compromise between 3% and 12%!
2. If China slows significantly, what will the implications be on its domestic sectors and on other Asian economies?
   • Clearly, China’s consumption has to slow considerably: people will save even more.
   • This means that all intra-regional trade, whereby China makes parts that are exported to other Asian countries for further processing or for final consumption, slows.
   • Then there are the effects of China's slowdown on the American economy.
3. There's talk about a second stimulus package from China. What do you think are the items that the government must include to boost its economy?
   • We read that now the provinces want to inject RMB 13 trillion into the economy: sounds like “expectations inflation” is booming.
   • The ONLY thing that would provide an instant and massive boost to consumption would be for Beijing and the Provinces to provide huge health care benefits. That would reduce peoples’ fear factor of being unable to work when sick, and that reduction in fear, in turn, would boost consumption.
4. What's the outlook for China's stocks?
   • Miserable.
   • First, the Economic Clock® keeps giving us worse and worse readings – so how can earnings improve with turnover and margins “on the wilt”?
   • Second, these are exacerbated by more global messes: the chickens of irresponsibility are coming home to roost!
   • Finally, the regulators themselves have been telling the market where to go for a good two years – and that Diktatkapitalismus has not helped in the least!
5. Are there other concerns or issues about China that you'd like to highlight?
   • I have to re-iterate that if China were to institute a proper health care system, the general population’s fear of not having enough money when ill would dissipate very quickly.
   • Traditionally, countries with huge current account surpluses need to consume more. This is what the US did in the thirties, and what China needs to do now.
   • I am concerned that China will become American politicians’ whipping boy yet again, something which my most recent book, Trade Myths, warns of. If you strip-out the onshore activities of multinationals operating in China, she would have to import more from abroad; therefore, this removal of MNCs would increase China’s imports considerably. The political gain would be cheap; the cost to MNCs would be huge.
   • China’s key challenge is governance. The place is big and loose. Lieberthal’s “matrix muddle” pervades all levels, so nobody really is in charge. That is why Beijing is sending out 24 task forces to ensure that the monies for the RMB 4 trillion stimulus package are spent honestly. We will see, that would happen nowhere in the world.

Comments

[j_remington:]

I like your points. However, regard this time as the best opportunity to accumulate FXI and PGJ.

2008 Nov 26 08:48 AM

[carolinacoast:]

"What's the outlook for China's stocks?
Miserable."

I love blanket statements. And let's not forget the "immediate need for a proper health care system"- nice sales pitch. So overall, China is just screwed, is that it? No winners, total chaos. Apocalyptic.

2008 Nov 26 11:37 AM

[Feng:]

The idea of an immediate proper health care would make people spend immediately is pretty off. If the government takes this approach, chances are they end up stuck with a screwed health system even worse than american's. Which would be a huge liability for the long term development of China. Just think about the health care mess the US is facing today.

Plus, people don't necessary have no health care. My parents are retired and have good healthy coverage (much better than what average american has). Yet they are still saving a lot. It's also a culture thing. And I am sure it will change over time, but the idea of having a health care in place will make this change over night is quite laughable.

Lastly, the history has proven than when ever the developing countries take the advices from the west experts, they got burned. When they don's listen, they do fine. Western countries say you need to open your financial market for your development, so there is asian crisis in 97. (btw, they also mandated heavy doses that they themselves today refuse to take, such as let those bad banks go belly up). China has benefited a lot by learning and experiencing in its own pace. That approach had benefited so much for the country. As shown in the minor impact to the Chinese financial services industry in today's crisis. Just keep doint it, China will be just fine.

2008 Nov 26 05:25 PM