Tuesday, September 28, 2010

'China cannot carry world's growth'

By Ethel Hazelhurst

Despite the apparent V-shape of the global economic recovery there are a number of threats on the horizon, according to Adrian Saville, the chief investment officer of Cannon Asset Managers.

Speaking at a conference at the Gordon Institute of Business Science yesterday, he said among the problems was the perception that China's economic performance could be relied on to drive global growth.

Saville expressed reservations about the quality of official data from that country..

He agreed the giant Asian economy could be described as an economic miracle, having moved from the 100th largest economy in the world in 1973 to overtake Japan this year to move into second place.

"However, the data out of China are incredibly misleading," Saville said.

In 2008 and 2009 when the global recession hit, China's official growth rate remained above 8 percent each year.

And Saville pointed out an anomaly: China's growth has been largely export driven and in that period world trade slumped. "Here we have the sharpest economic slowdown since World War II and there is an export miracle. When your biggest client, the world, is in recession, how come you are still achieving economic growth of 8 percent?"

He expressed surprise that the data has been so readily accepted, despite the fact that China reports on quarter growth two weeks after the quarter ends. In most countries there is a delay - in South Africa there is a gap of about eight weeks before data on gross domestic product (GDP) are released.

Another threat to the recovery is posed by the past "gross over-consumption in the US", which led to a consumer debt problem that would not be solved by low interest rates. He referred to the "1.5 billion credit cards among 300 million Americans".

Derivative positions are also a hazard, according to Saville. "Derivatives today are bigger than when we went into the crisis," he said. He said the value of derivative positions was currently more than 20 times the value of global GDP. "In the late 1980s they were less than global GDP."

The debt problems, which originated in the US subprime housing market in 2007, were vastly magnified and rapidly escalated because speculators had based derivative positions on the underlying paper. The contagion quickly spread.

Another danger to the recovery, Saville said, was growing social tension in countries where government spending was being drastically cut.

Saville said a number of countries lacked the ability to pay their way because they had ratios of public debt to GDP that were above the accepted level of 60 percent of GDP and budget deficits that exceeded the 3 percent of GDP benchmark. They include not only Greece, Spain, Portugal, Ireland and Italy but also the UK, the US and Japan.

He quoted Bill Gross, who runs the world's biggest bond fund, Pimco, as saying UK government bonds "are resting on a bed of nitroglycerine".

In the US, according to Saville, total credit market debt is equal to 360 percent of GDP, compared with 260 percent in the Great Depression. "And the federal government adds $4 billion each day."

The question for the US, he said, was "not whether to default but how". The debt would probably be "inflated away".