Why Nouriel Roubini Is Wrong on China's Economy
Famed bearish economist Nouriel Roubini has been making waves for arguing China's economy will suffer a hard landing after 2013. He reasons its 47 percent fixed investment share of GDP, 30 percent savings rates, and low wages will cause a deflationary spiral much like in Japan. Roubini called the recession in America and is no lightweight economist.
However, Roubini is wrong about China because he surprisingly misunderstands basic trends on income, demographics, and investment there.
He argues the mainland has similar savings rates to Hong Kong and Taiwan. Consumers in all three economies save nearly 30 percent of disposable income, so Roubini trots out the cultural argument that Chinese save despite strong safety nets. Nothing can be done to spur consumption according to this reasoning. Digging deeper indicates Roubini needs to take out a bigger shovel and bury old stereotypes.
My firm interviewed 5,000 Chinese in 15 cities last year. It is true consumers over the age of 60 reported savings rates near 60 percent because they feared soaring medical and housing costs. After living through decades of upheaval and missing out on the recent economic boom, they remain thrifty. Little can be done to change decades of ingrained habits.
Our research suggests the key metric Roubini misses is shifts in how younger Chinese spend. Respondents under 32 years old had effective savings rates of zero. They remain confident about their money-making potential. Secretaries earning $600 a month commonly save two month’s salary to buy the latest Apple iPhone or Estee Laudercosmetics.
Consumer finance reforms are also spurring more consumption for younger Chinese. Total credit cards in circulation rose from 13.5 million in 2005 to 240 million in 2010 and will rise 22 percent annually for five years. More than 80 percent of the 18 million auto sales there last year were paid 100 percent up front. Brands like Toyota and General Motors are starting to push financing options, which will further unlock consumption. The data dispels the myth that Chinese are culturally high savers.
The fixed investment share of GDP of 47 percent is too high as Roubini rightly points out, if it were a long-term strategy. However, fixed investment rose from 42 percent before the financial crisis. In other words, the increase is a short-term stimulus to offset lowered exports due to the world’s malaise. Short-term increases in fixed investment like building railroads and airports are smart strategies to maintain employment rolls and build confidence.
Dangers in fixed investment occur when investments are unproductive, like roads to nowhere in Japan, or continue too long to be sustainable. If rates hover near 50 percent for five years, trouble might emerge. Until then, spending provides a buffer against global economic problems until normalcy in the markets return.
Unlike Japan which built billion dollar roads to prop tiny hamlets of several thousand people, China' spending improves economic efficiency. New rail systems have cut travel time from 11 hours to 5 between Shanghai and Wuhan, increasing productivity for 40 million people. Similarly subways reduce congestion and allow for more affordable housing units to be built.
Roubini also underestimates wage growth. Minimum wages in Sichuan rose 44 percent last year, mirroring double-digit increases elsewhere. Beijing’s municipal authorities even announced multinationals should have minimum wages 1.5 times that of local firms. Wage inflation is so serious that Foxconn, the maker of products from Amazon.com to Intel and Apple, is mulling a $12 billion investment into Brazil as China no longer has a cheap labor pool.
Entrepreneurs often park profits in their companies rather than taking them out as dividends or salaries as corporate taxes are lower. They also charge housing, vehicle and even gym membership fees as business expenses. This is why income is often understated by economists who don’t dig deep enough.
Some argue China top-down political system with its many levers makes it immune from economic cycles. That is not true – while the current political system minimizes risks nothing can prevent the country from ultimately going through rough patches and adhering to the laws of economics.
Short-term, problems are far more likely to emerge due to inflation being exported from America because of Ben Bernanke’s QEII. Longer-term an aging population, over investment in private commercial projects, and a weak education system pose the greatest risks.
The government needs to start addressing these issues by privatizing the education system more, loosening the one-child policy, and sopping up excess liquidity in the commercial real estate sector.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai. Follow him on Twitter at @shaunrein.