While China’s long-term prospects – economically, politically and socially – remain bright, the short term is looking increasingly cloudy. Longview Economics, a London-based investment strategy consultancy, believes that the Chinese credit bubble will burst within the next 12-18 months and the region, particularly resources exporters, will suffer a similar debt-deflation cycle as the UK.
Chris Watling, chief executive of Longview Economics, told the Australasian Financial Forum meeting in Sydney last week that the four key ingredients of the bubble in evidence were: rising asset prices; cheap money and increasing indebtedness; seemingly plausible explanations, such as long-term urbanization driving growth; and, a diminishing return on capital.
While he believed that China would re-emerge on its growth trajectory after this shock, Watling said the big question was when does it happen.
The rude shock for countries like Australia is that a big crack in the Chinese financial system, which is inexorably linked to property, is likely to be the catalyst for a plunge in the currency. The $A is at its highest point for 100 years according to Watling.
“If we’re correct, one of the worst effect will be the Australian economy,” he said. “The AUD$ is at its highest point for 100 years… We think the AUD$ will fall sharply. Interest rates will also fall sharply, perhaps to zero. Then (Australia) will enter a similar debt deflation cycle as we’ve seen in the UK.”
He added that this would go on only for “just a few years” and China would recover its upward momentum.
Longview Economics believes that the US economy has entered a resurgent phase and is looking to move up to GDP growth of about 2.5 per cent. For the first time in a decade the US$ has risen at the same time as the US stock market.
But the other major theme is the Chinese “credit bubble”. In the past 40 years, Watling said, the “debt parcel” had been passed around the world. In Latin America, it unraveled in the late 1970s, then in Japan in the late 1980s, followed by the Mexican crisis of 1994, the Asian crisis in the “tiger” countries in 1997, the tech boom of the late 1990s and the global financial crisis from 2007.
“Now, we’ve passed it onto to China.”
