After recovering somewhat from their terrible January, Asian stocks have been sliding the past three weeks on renewed fears about China. According to the WSJ, the economic outlook for the Middle Kingdom just keeps getting grimmer:
At a recent workshop hosted by the Council on Foreign Relations, a nonpartisan U.S. think tank, participants—35 or so academic economists, Wall Street professionals and geopolitical strategists—lined up around three different growth scenarios for China. Only 31% chose the optimistic one, defined as 4% to 6% annual growth, dependent on leaders successfully implementing reforms; 61% foresaw a “lost decade” of 1% to 3% growth; the rest thought a so-called hard-landing, or contraction, was most likely.
Of course it wasn’t a scientific survey, but what’s interesting is that apparently nobody considered the possibility that the Chinese government could deliver on its promise of “medium to fast” growth, meaning 6.5% or higher.
If the old-style bulls are virtually extinct as a species, a major reason is widespread skepticism that the Chinese leadership under President Xi Jinping is focused on economic transformation.
Instead, Mr. Xi’s attention seems to be fixated on his anticorruption drive, cracking down on internal dissent, bringing the media to heel, firming up his control over the security forces and challenging the U.S. for dominance in the South China Sea.
It isn’t just that the crackdowns come at the expense of economic reforms, either. Xi has been firming up the Party and centralizing authority precisely because he fears for China’s economic future. If the CCP can’t deliver rising living standards and employment as it has for decades, it needs a new grip on power. The more we learn about China’s economic fundamentals, the better we understand what Xi is facing, and perhaps even what he knew was coming years before the markets did. Xi believes the Party is the only political entity capable of ruling China, so hatches must be battened as the storm clouds swirl overhead.
If both Xi, an the economists who now say 4-6 percent growth is optimistic, are right, then that means the global economy is probably headed for a quite rough patch. Many governments and companies—particularly in developing countries—invested in factories and mines to feed the Chinese dragon; the collapse in value of all those assets is going to send even more shockwaves around the world.