Das: No Hard Landing For China, But Globalization Has Peaked

Includes: EEM, FXI, IVV, SPY, VWO
by: Financial Sense

By FS Staff

What's the most likely outcome for China? How will its slowdown affect the U.S., other developed nations and emerging markets? To answer these questions and more, Satyajit Das - internationally recognized financial expert, former banker and best-selling author - joined the Financial Sense Newshour in a recent interview to explain this unfolding process in full detail.

Do you see China suffering a hard or soft landing?

China risks having a financial and economic crisis - the so-called Minsky moment. But, to be honest, let's look at how this crisis probably gets resolved. Because I think there is what I call the "doom and gloom lobby," which is the world will collapse and China will basically have an enormous breakdown in its financial system: banks will go bankrupt and the whole system will collapse. And then there's the other side, which I call basically the Panglossian view, that the Chinese are basically in control of everything and they will manage to actually control this transition that they need to do. Now, I think the Middle Kingdom will follow a middle way...it's going to take a long time and it's going to be slow. But I think that is the most likely way, rather than the extremes.

What about recently announced Chinese reforms? Will they accelerate China's transition to more sustainable growth?

The Chinese are very cautious and they're not going to do anything that's terribly precipitous. On the ground I see very little sign that these are anything other than for Western consumption. They're going to hasten very slowly with these reforms simply because they are acutely aware that pushing hard on any of these could have very very serious repercussions and destabilize an already fragile economy.

Do you think emerging markets in general, and China in particular, will take back the global growth baton?

The myth of an emerging market world or baton change from the developed market to the developing world, I think, is one of those things that sells books and also sells analyst reports and all that sort of stuff. I think the reality is far more nuanced and complex than that and I certainly don't anticipate an Asian century for instance. I anticipate a continuation of the American century with some changes.

With China and emerging markets slowing down, what is your projection for the global economy?

Underlying the growth of the last 20 or 30 years has been massive globalization. And I have been saying for the last 5 years that one of the fallouts of the crisis is going to be (a)...drift to closed economies. So, I think we've seen the high point of globalization and that will have some impact on overall trend growth lines. To give you an idea, global trade has grown at roughly double GDP growth rates for the last 10 to 20 years. Now, at the moment, global trade is only growing around 2%, which is absolutely the lowest rate since the fall of the Berlin Wall and that's telling us something about that trend. The second thing is cross-border capital flows have also drastically fallen in the last 4 or 5 years, and that also has been a catalyst for growth. So I think the signs are not good in that regard. I don't think it's about the world falling off the edge of a cliff, but it is about a measured slowing in the trajectory.