World Economy

Kovacevich: China isn't the world's growth engine

US markets overreacted to China: Robert Hormats

Former Wells Fargo chief Dick Kovacevich said Tuesday that China's economy has slowed because the rest of the world has decelerated, not because it's the world's growth engine.

"Until they have their domestic economy more dominant, they're simply reacting to the worldwide economy," he told CNBC's "Squawk Box," referring to the country's effort to transition to a consumer-led economy rather than one fueled by exports and investment.

"Everyone says China is slowing. No, the world's economy is slowing."

In contrast, the U.S. economy is doing well because the country is not overly dependent on exports and can grow in the absence of a worldwide economic boom, Kovacevich said.

"China can't, or can't to the same degree by a huge factor, until they get their domestic economy going."

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China sent shock waves through global markets last month when it unexpectedly devalued its currency. Some market watchers feared the move, which supports China's exports, was a sign that the country's economy was slowing more than previously thought.

Robert Hormats, Kissinger Associates vice chairman, said it was too soon to know whether China's deceleration has bottomed.

"I think it will be hard to tell because it is not as transparent as some other countries," he told "Squawk Box."

However, he said President Xi Jinping was doing the right things and his team is committed to allowing market forces to play a greater role in the Chinese economy.

Xi arrives in Seattle on Tuesday, where he will give a speech and meet with business leaders. He then travels to Washington, D.C., and meets with President Barack Obama.

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Why doesn't China begin privatization?

Kovacevich said he believes state-owned enterprises were part of the problem, and that China should move toward privatizing some of them in order to motivate others to become more competitive.

"If you let just competitors cause them to change, that's a pretty slow process because [state-owned enterprises] have some great competitive advantages. They get more credit at less cost, et cetera, and they're so entrenched in that."

Hormats said that process has begun, but the problem is state-owned businesses are massive employers. For that reason, he said, they get support not only from China's Communist Party, but from influential provincial governors who fight any job cuts linked to privatization.

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These businesses also absorb a lot of capital, but are not very efficient at deploying it, Hormats said. That money might be better used by start-ups and medium-sized companies, which utilize capital more efficiently, he added.

"The government knows this, and over a period of time, it's trying to get the banks to do that."

Still, it takes time to reduce excess capacity when moving away from an investment-driven economy with a lot of overcapacity to one dependent on services, Hormats said.

"They recognize that. The question is how quickly they can do this. When does private sector demand, when does consumer demand, increase to the point that it drives up some of the slack in the manufacturing sector of the economy?" he asked.