Austrian School Analyst: Short China

Of the 19 economists surveyed by Marketwatch, only the Austrian school analyst understands what is going on in China. He sees the crisis, though I am even more bearish on China then he is. MarketWatch reports:

While much of the analyst community has touted China’s growing domestic demand in recent years, [Jim Walker, founder and managing director of the Hong Kong-based economic research company Asianomics] sees the Chinese consumer as unlikely to show much resilience, now that the economy is on a weakening trend and easy credit has run its course.

“The contrarian call we have is to short or underweight consumer plays until we get through this,” said Walker.

Walker ranked as the most pessimistic of 19 major global investment managers and brokers which MarketWatch surveyed last month for their views on China’s economic outlook. See report on MarketWatch’s China survey.

Walker, a former chief economist with brokerage CLSA, was among the minority of economists surveyed that forecast a hard landing for China within the next three years.

In his view, China’s gross domestic product growth will slow to 4% year-on-year, while the real rate of growth will appear almost flat when adjusted for inflation — and he doesn’t rule out a more serious downturn, either.

“I don’t think a contraction [in GDP] is out of the question by any means,” Walker said.

Some pockets of the Chinese economy will take time to feel the full scale of the downturn, but the broader economy has already begun to stall, he said, with official data likely to show signs of sharp deterioration over the next six months.

He puts cement companies and real-estate developers in the category that will appear somewhat resilient before a deeper downturn takes hold, with the temporary reprieve supported by earlier pre-sales of housing projects.

Ultimately, however, many companies is those industries will collapse and eventually undergo consolidation, Walker said.

“Property-led growth and infrastructure-led growth is just about finished,” he said.

Walker, who adheres to the controversial Austrian school of economics, said that what’s unfolding is part of the normal business cycle, in which activity contracts and investments have to be written off.

He believes that China’s low interest rates have helped stoke mal-investment on a scale never seen before, and that another government stimulus package appears unlikely, given a glut of overbuilding, including transportation projects such as airports...

Walker is also skeptical of China’s apparently perfect streak of uninterrupted economic growth, which data show has averaged more 9% annually since reforms of the 1970s.

He said the non-stop growth might be a result of patching over official statistics to remove evidence of prior downturns, and he believes a recession did in fact take hold in the early 1990s, wrecking havoc on the Chinese banking system.

Data later showed that by the middle of that decade, Chinese banks were laden with non-performing assets equivalent to around of 25% to 40% of their balance sheets, levels that were much worse than anything seen in the U.K. or the U.S. during the Great Depression, Walker said.

“It will come as a surprise to people who don’t believe that the Chinese economy can have a cycle,” Walker said, referring to what he sees as a deflationary fallout that lies ahead.