How will a hard landing in China affect different countries and markets around the globe? What about commodities? Will the U.S. markets be affected? To answer these questions and more, Dr. Jim Walker, Founder and Managing Director of Asianomics in Hong Kong joins the Financial Sense Newshour to share his thoughts. Here we present a few key excerpts of his audio interview just posted on the Financial Sense Newshour page (click here for access).
Is China headed for a soft or hard landing?
"I don’t think there’s any chance that China can have a soft-landing given the position that it’s in at the moment…in our view, what’s going to happen is companies are going to have to start cutting back on cap-ex, reducing the excess capacity that’s been put in place over the last few years. Some bad capital has got to be shaken out of the system and I’m afraid interest rates have to move to a much more normal level, which is significantly higher and with that we’re probably going to see China move into recession rather than even a slowdown in economic growth. I think they’re really facing a contraction with the difficulties they’ve created for themselves."
Does China face an inflationary problem by trying to prevent a downturn in their economy?
"Yes, this is happening almost immediately now…there’s not inflation in the commonly measured consumer price inflation…but real inflation pops up right away in houses and house prices. So, last month, for example, was one of the fastest month-on-month increases in house prices in China in the last 3 years. In Guangzhou, which is in Guangdong province, the rate of home price increase touched 20% year-on-year. If this sounds reminiscent of the U.S. in 2005 and 2006, you’d be correct. The credit just keeps going into the places where prices are rising fastest, which means you get less and less buying for every increased credit buck, as it were."
When the U.S. experienced its housing bubble, one thing that helped buffer many homeowners from getting hit by rising rates was by locking in a 10, 15, or 30-year fixed mortgage rate. Is it correct that China doesn’t have long-term mortgages available?
"That’s right. Usually the mortgage rates in Asia are variable—they vary with any changes in the official interest rate in most countries…there’s no such thing really of a fixed rate mortgage in almost 95% of Asia."
What specifically do you see as the catalyst for economic contraction in China? What sort of metrics are you looking at?
"What we do at Asianomics and through our sister company, Forensic Asia, is to try and build a picture of the economy from the bottom-up. Forensic Asia looks at the company results and the balance sheets of the listed sectors in China, and the reason we think the problems in China are much more imminent…is because when we look at the state of corporate finances and the balance sheets of companies in the listed sector, what we find is that they’re close to insolvent. The debt to operating cash flow is now in the region of 7.7 times. In other words, it would take companies in China an average of 7.7 years to repay that debt through operating cash flow if they couldn’t just borrow money in the banking system to roll over that debt. Whenever we’ve seen systems move towards a range higher than 6 years, it tends to be the case that the companies will begin to reduce that capital expenditure and naturally repair their balance sheets…but that always induces a downturn—always effectively induces a recession. And we think Chinese companies are at the point now."
In the rest of this interview, Dr. Jim Walker talks about the adverse consequences a major contraction in the Chinese economy would have on select markets, their view and position on the U.S., along with their long-term view on commodity prices.
If you would like to hear this full interview with Dr. Jim Walker of Asianomics, CLICK HERE to subscribe. In addition to hearing from money managers, institutional investors, and analysts regularly interviewed for FS Insiders, you’ll also gain access to our entire archive of past interviews.