Greenspan, IMF diverge a bit on China(fears of hard landing)

But caution and fears of hard landing are the same
By Lisa Twaronite, CBS.MarketWatch.com
Last Update: 6:55 AM ET Aug. 26, 2004

TOKYO (CBS.MW) - When it comes to the success of China\\\'s steps to slow down its booming economy, Federal Reserve Chairman Alan Greenspan and the International Monetary Fund are reading from different pages.

But while the tone of their short-term assessment of China\\\'s policies to date may differ, both certainly share the same fears about the long-term outcome of those policies.

Growth in Asia has \\\"braked sharply\\\" in recent months, as Chinese government officials take policy steps to \\\"muffle the boom\\\" in the economy, Greenspan said in written answers Tuesday to questions submitted by Senate Banking Chairman Richard Shelby, R.-Ala., in conjunction with Greenspan\\\'s report to Congress on monetary policy July 20. See full story.

In contrast, Steven Dunaway, deputy director of the IMF\\\'s Asia and Pacific Department, said Wednesday that the most recent Chinese data gives a \\\"mixed picture\\\" on whether the economy is actually slowing down.

This makes the IMF \\\"cautious about how much of a slowdown has occurred up to now,\\\" Dunaway told a press conference to coincide with the release of the fund\\\'s latest review on China\\\'s economy. See full story.

Do \\\"muffled boom\\\" and \\\"mixed picture\\\" describe the same country? Yes, say economists - when that country is an emerging market trying to deflate a credit-driven investment bubble without choking off growth.

\\\"Different observers of an economy have a different slant on it, so I don\\\'t think there\\\'s a great mystery there,\\\" said Paul Sheard, Lehman Brothers\\\' chief economist for Asia.

In terms of data and transparency, China lags behind much of the developed world, which can make tracking its progress difficult, he said.

\\\"We\\\'re talking about a transitional economy, one in which market forces are working in a selective way, so nobody is quite sure exactly what\\\'s going in China,\\\" he said. \\\"So I think we\\\'ll cut the IMF and Fed some slack.\\\"

On one key point, both Greenspan\\\'s and the IMF\\\'s assessments were strikingly similar.

Greenspan said there is still a risk of a hard landing in China, while the IMF said a soft landing for the Chinese economy \\\"is not yet assured.\\\"

Both Greenspan and the IMF recognize that China has been an engine of growth for the global economy, and neither expects that engine to slow this year.

The IMF raised its forecast for China\\\'s real gross domestic product growth to 9.0 percent in 2004 from the previous estimate of 8.5 percent.

Greenspan predicted that \\\"continued strong export growth and recent signs of an acceleration in consumer spending suggest that Chinese GDP growth will rebound in the second half of the year.\\\"

Greenspan didn\\\'t offer China any monetary advice, but some IMF directors and staff recommended a tightening.

So far, the Chinese government has mainly relied on administrative cooling measures.

\\\"We saw more of a pressing need for some additional monetary tightening to take excess liquidity out of the banking system. We thought that sooner would probably be better to ensure there is a nice slowdown in the economy,\\\" Dunaway said.

Some private economists disagree, and say that further tightening would lead not to a \\\"nice slowdown,\\\" but to a credit crunch that would strangle investment and threaten growth.

On Monday, central bank governor China\\\'s central bank governor Zhou Xiaochuan issued his own \\\"good news/bad news\\\" assessment in a statement on the bank\\\'s Web site. See full story.

\\\"The economy is heading towards the direction set in our macro-economic control campaign, but up to now, there is still no apparent easing in the expansion of demand and inflationary pressure,\\\" Zhou said, according to AFX-Asia.

At the very least, most economists agree that Chinese officials might not know where their economy is headed, but they understand where it\\\'s been and what brought it there. They also grasp the gravity of the decisions that lie ahead for them.

\\\"Investment bubbles are notoriously difficult to get under control in the best of times,\\\" said Lehman Brothers\\\' Sheard. \\\"The Chinese are, of course, aware of that, as are the IMF and the Fed.\\\"

It's incorrect to call this an "Investment Bubble." The Shanghai Stock Market may be overheated also, but the vast majority of this Bubble is exactly the same as the Japan problem of a decade ago, one that Japan is just emerging from.

It's really a lack of private investment and an over-reliance on bank loans to fund business expansion. There is not a very large "investor class" in either Japan or China (or in most of Asia for that matter). Most folks put their money in the bank and expect a decent rate of interest. This puts all the pressure on the banks to find good places to loan this money to. Most of the ventures in China are highly risky by U.S. banking standards and like Japan, when they go sour (without proper transparency and controls) the bank often just props up the bad loan with more money, carrying an inefficient failure on the books as long as possible.

In Japan, such non-performing loans kept quietly growing and caused a 10-year deflationary recession. In China, banks are forced to keep propping up former Communist-owned businesses that still don't know how to compete efficiently. With no fear of bankruptcy, these enterprises just keep eating up resources and mis-allocating scarce capital.

It's a dangerous situation and will come crashing down in the next 12-months, I believe. But all is not bad here. When Japan tanked, we hardly felt it. Actually, it gave Bill Clinton a huge lift as the U.S. Stock Markets received a huge amount of investment as a safe-haven. Later in the '90s, when George Soros knocked off the other Asian economies in Burma, South Korea, and Thailand, the U.S. markets boomed again.

I think that when China proves to be a paper tiger, we'll have another stock market boom here at home.

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