Pettis's China 'Long Landing' Hits An Air Pocket
Cam Hui | Sep 07, 2014 12:44AM ET
Noted China watcher George Magnus shows that while investments in a number of Tier 1 cities look fine, Tier 2 and 3 cities are showing signs of oversupply.
h3 China: Investment and growth by city/h3
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Already, the cracks are showing. The latest figures from JP Morgan show that house price declines are spreading to 91% of the cities. In particular, prices in Tier 3 cities are cratering:
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What we are seeing, in effect, is the reversal of the wealth effect in China. Because regulated bank interest rates were negative in real terms, savings went either into wealth management products or real estate - and there was leverage in much of those real estate holdings.
When consumer spending is "tightly and obviously linked to property investment", how does rebalancing occur? How can China, as David Keohane puts it, "force a new middle class into existence"?
These conditions call for a serious re-evaluation of China`s growth path. The Pettis "long landing" scenario just hit a major air pocket and its likelihood is quickly diminishing.
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Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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