The Chinese economy is slowing down, and the entire world is watching to see what happens next.
This summer the country’s stock indices crashed twice, China devalued its currency, and the country’s traditional growth drivers – exports, manufacturing, and property – all started flashing red.
So there are tons of questions.
Will the government be able to stop the bleeding?
Will companies start collapsing under the weight of high-levels of corporate debt, which the International Monetary Fund warned about in September?
Will the government blow through its foreign-exchange reserves as it tries to defend the yuan’s value against traders pushing it down?
All of these questions are really important, but they are part of one bigger question: What is really going on in China?
We asked some of brightest minds on Wall Street that, and they shared their thoughts with us.
Bill Bishop, publisher of China newsletter Sinocism: “What is not uncertain … is that Xi is in charge.”
“Uncertainty. Uncertainty among global investors about the data, policy-making competence, and political situation. Uncertainty among the Chinese elite and officials about what Xi Jinping wants and whether or not they are safe.
“What is not uncertain, however, is that Xi is in charge. He made sure of that by quickly consolidating control over the sources of hard power – the security services and the military – with the takedowns of Zhou Yongkang, Xu Caihou, Guo Boxiong, et. al.
“Being in control does not automatically translate into being able to force the bureaucracy to do everything you want it to do, however, and it rarely if ever has in Chinese history. “
Carson Block, founder of Muddy Waters Research: “Chinese companies don’t have the fundamentals, governance, or transparency to merit high valuations.”
- Yahoo Finance, Business Insider
“The collapse in Mainland China shares is a result of the government’s deliberate creation of a stock bubble. Chinese companies don’t have the fundamentals, governance, or transparency to merit high valuations – let alone bubble valuations.
“China’s government exhorted retail investors to buy shares, calling it ‘patriotic,’ but the pain of this collapse is far-reaching, and has probably done real damage to the balance sheets of households that could least afford to lose money.
“Many Chinese people have come to believe that their government can conquer market forces, and that it’s omnipotent. At the very least, this perception is damaged, which shakes faith in the entire economic model domestically. By spreading the pain to numerous low-income households, the government is risking widespread backlash.”
Fraser Howie, independent analyst and co-author of “Red Capitalism”: “Those looking for meaningful, economy-changing reforms will be disappointed.”
- REUTERS/Aly Song
“XJP’s corruption clampdown has created a civil war of sorts within the elites and the CCP. The clampdown has lead not to better government but inaction as no one dare do anything for fear that they could be next. This comes at the worst-possible time.
“The economy really is slowing dramatically and the summer of missteps in the capital markets has shattered investor’s confidence in the authorities’ ability to control what is going on. The government is now trying to find a coherent narrative to explain what is going on.
“Those looking for meaningful, economy-changing reforms will be disappointed. China isn’t collapsing but the world has now realized that it’s problems have no quick solutions and the pain will continue for many years.”
Wei Yao, economist at Société Générale: “The People’s Bank of China cannot keep the renminbi stable for much longer.”
- Societe Generale
“1. The economy is in a bumpy landing, with investment hard-landing and consumption soft-landing.
“2. The infrastructure investment is picking up and the market may be overly bearish on the near-term outlook.
“3. However, the medium-term outlook is much less certain and the biggest issue is slower progress of corporate-sector reform.
“4. The PBoC’s monetary policy will have to remain accommodative, thus diverging from the Fed’s tightening path. This means that the PBoC cannot keep the RMB stable for much longer.”
Tom Orlik, Bloomberg economist: “Reformers continue to win victories, notably on interest-rate liberalization.”
- Feng Li/ Getty Images
“The end for China is not nigh. Concern about the impact of the stock collapse on the real economy is overdone. Reformers continue to win victories, notably on interest-rate liberalization.
“Space for stimulus is not infinite, but neither is it all used up. I expect growth to continue slowing in the years ahead. I do not expect an imminent collapse.”
Barbara Reinhard, CIO of the US Private Bank at Credit Suisse: “The likely path forward for China will likely include a fiscal-policy response.”
- Business Insider Australia
“With a few exceptions, Chinese data has been pointing to early signs of better growth, from a very low base. Long-time China watchers know the Chinese equity market does not have a meaningful transmission into the local economy.
“The likely path forward for China will likely include a fiscal policy response to put a solid bottom into economic activity.”
Rob Sharps, senior portfolio manager at T. Rowe Price: “Global economic growth is much weaker and some of the cost advantages that they had from a manufacturing perspective no longer exist.”
- Getty Images
“The leadership of China knew they had to transition over time to a more service- and consumption-driven economy, but now they are doing it in an environment where overall global economic growth is much weaker and some of the cost advantages that they had from a manufacturing perspective no longer exist.”
Colin Hamilton, Macquarie’s global head of commodities research: “The next step may be to stop trying to support the world, and concentrate on managing their own internal risks.”
- Morgan Stanley
“China is trying to navigate a path of trying to deleverage from the excesses of the recent past while keeping growth at a level to keep its influence growing.
“From a policy perspective this is becoming harder and harder, but there remains plenty of levers to pull if they think further support is needed. It is difficult to transition away from a fixed-asset, investment-heavy economy overnight – this is more likely to be a decade-long cycle with plenty of mini-cycles.
“In the near term, the next step may be to stop trying to support the world, and concentrate on managing their own internal risks. The net result may be a slower path towards financial and state-owned enterprise reform.”
Christopher Balding, professor at Peking University HSBC Business School: “Beijing’s ability to manage the economic transition to a slower economy will … prove to be one of the defining events of the 21st century.”
“China is undergoing a rapid slowdown in its economic growth caused by relatively high labor costs, unsustainable debt levels, and enormous surplus capacity from years of politically motivated investment.
“Having staked its credibility on sustained economic growth, the Chinese Communist Party is concerned that stagnant wages and rising unemployment will cause [the] Chinese populace to question its relevance in a time with so many being charged with corruption and a new generation having grown up in the electronic age seeing little need for censors.
“Despite the talk of economic reform, Beijing appears to be increasing its assertiveness over the economy and financial markets, merging state-owned enterprises to create gigantic firms and increasing debt. Beijing’s ability to manage the economic transition to a slower economy will, regardless, prove to be one of the defining events of the 21st century.”
Gillem Tulloch, founder of GMT Research: “Repeated rounds of stimulus … make the situation worse and show that they don’t really understand the problems.”
“China’s policy makers seem intent on fighting the inevitability of a corporate sector de-leveraging cycle. Repeated rounds of stimulus to reinvigorate the property and automobile sectors won’t work, make the situation worse, and show that they don’t really understand the problems.
“A hare-brained attempt at a government-sponsored stock market rally smacks of desperation and is oblivious to market fundamentals or the role of the stock market to efficiently allocate capital. Of course, should you want to short the Chinese A-share market, the chances are that the authorities will threaten you with jail – something we’ve not seen since the days leading up to the 1997 Asian financial crisis.”
Josh Feinman, chief global economist for Deutsche Asset and Wealth Management: “The pendulum may have swung too far.”
“After flying high for years, buoyed by spectacular growth that lifted hundreds of millions out of poverty while reshaping many facets of the global economy, China is coming back to earth. Its economic growth is slowing, its formerly voracious appetite for commodities slackening, its industrial prices slipping, its distorted equity markets reeling, and its policymakers looking decidedly less assured, struggling to grapple with the country’s formidable challenges.”
“But now the pendulum may have swung too far, with people focusing almost exclusively on China’s vulnerabilities, losing sight of its remaining strengths. China still has ample catch-up potential, a deep reservoir of policy ammunition, and sound consumer fundamentals. So although its glory days of meteoric growth are over, and tough challenges lie ahead, some of the more apocalyptic fears – that China may be headed for Japan-style stagnation or even social and political breakdown – seem unwarranted.”
Maybe you need to get smarter about Wall Street tech …
- Mike Shaver/Flickr