Marc Faber: China’s numbers are fake

Late last year, I anticipated that the global slowdown would bring China’s GDP growth down to 2%, a level that would make most nations envious but which would have been catastrophic for China.  In the end, robust government stimulus has saved the day, as spending for infrastructure, commodities, and property has soared.  The 8% growth target seems likely to be met.

However, the malinvestment from excess lending has made China’s growth dynamic appear incredibly unbalanced as even China bull Stephen Roach opined yesterday.  An asset bubble is forming there. And even though shares tumbled 5% earlier this week, the correction was rather brief as the market came roaring back the very next day.

Perhaps this unbalanced growth and asset bubble is just the price China must pay in order to wean itself from dependence on export to the West.  After all, the country is still growing 8% whereas the United States has been in a mild depression over the past nine months.

That may make for nice copy, but is it really true?  Is China making the transition?  Are they actually growing 8%?  Marc Faber doubts it.

China’s economy is growing at 2 percent, not the 7.8 percent its government claims, says economist Marc Faber, publisher of the Gloom, Boom and Doom report.

“The Chinese government is one of the few governments in the world that knows its GDP numbers three years in advance,” Faber told CNBC.

“I’d be a bit careful about China.”

A growing number of investors turned bullish on China after its markets began to rise last March, Faber notes, adding that it’s possible Chinese markets will continue to rise for a while.

“If you throw money at the system, lots of things go up in value — but maybe they go up for the wrong reasons. What disturbs me today … is that the lows in March and late last year, sentiment was incredibly bearish about everything.”

Now, Faber observes, “there’s this incredibly bullish sentiment when insiders are actually selling and the technical picture of the market doesn’t look that great.”

Faber believes the market faces headwinds because there’s a huge supply of available shares and a record number of new issues, which dampens share-price increases.

“My sense is that, near term, we could still have disappointments because now the mood is very optimistic. I don’t think we’ll make new market lows in Asia, but I do think we’ll have a meaningful correction.”

On Monday, China’s first initial public offering in nearly a year rose so high and so fast that regulators were forced to halt trading twice, The Washington Post reports. The Hang Seng index rose to double its low point last fall.

There is a lot to like about China. But, this all sounds very toppy to me. Caution is definitely warranted.


Faber: China Really Growing At 2 Percent – Money News

  1. Vangel says

    The warnings about China may make some sense but things may not quite be what Dr. Faber and many of the China doubters say they are. I used to work in China and still have friends there. My wife is Chinese and still has family there. Her students (she teaches the guzheng) are mainly Chinese and often go back for visits. Almost everyone has been telling the same story. Things seem to be moving rapidly in many of the larger cities. People are going out and spending a great deal. Car sales are going well and even many farmers tend to have cell phones and flat screen televisions. Building activity is brisk and many are still lining up to purchase better accommodations.

    The real issues are in the countryside where many of the transient workers have gone when economic activity contracted and their employers closed down. There could certainly be trouble when these migrant workers start to get bored and run out of money. The government knows this and I suspect that it has many public works on the books that will be approved so that more jobs can be created for the under- and unemployed workers. From what I can tell the government has no trouble allowing some of its ample USD reserves to be used for these purposes. The money will be used to buy equipment and materials needed to build the infrastructure and loans will be provided so that companies can hire workers and do the job. While some of the investment will be ill advised and unnecessary it may be that the government prefers to have new schools, roads, railways, transmission grids, sewers, etc., in place than to be left holding USDs that are going to lose purchasing power in the future. Eventually the bureaucrats will permit the RMB to increase in value and when that happens they expect that China will have the capital required to provide goods to the countries from which it imports essential commodities that are required for products that will be exported or consumed domestically. They are hoping that a rising RMB will mean lower inflationary pressures for Chinese citizens at a time when Americans find it much harder to bid for scarce resources and have little in the way of capital to compete in value added activities.

    While I distrust government bureaucrats and their plans I would still rather place a bet on Chinese economy than on the EU or US economies at this time. While the Chinese will experience some serious volatility, their economy should still grow much faster than the economies of the West.

    1. Edward Harrison says

      Vangel, you make some good points and I appreciate the personal anecdotes tremendously.

      I agree with you about China having much brighter longer term fortunes than the US or Europe. As you say, the Chinese will undoubtedly experience volatility but their growth will be faster than the West’s.

      I imagine the Chinese will start to remove RMB restrictions slowly if the global economy does recover and the Chinese are successful in stoking domestic demand. This could mean the dollar tanks as a result.

      For the time being, there is a bubble forming in China and its popping will have some medium term consequences, not just for those in the countryside but also for those in the cities because the ones being laid off are not going back to their former provinces and that makes for millions of restless former peasants in the cities. These are the people that the bureaucrats want to employ in order to avoid civil unrest.

      1. Vangel says

        With all due respect, I have been hearing the China bubble story since the early 1990s and most of the calls have been premature. While we did see some short term contractions in some areas most Chinese economic activity seems to have been moving forward and the standard of living has been going up sharply for many people in the cities and the countryside.

        Is there a bubble in some sectors and some cities? I would say yes. My ten-year old son counted 160 cranes as we drove alnong the ring road from my hotel just outside Xi’an’s city wall to my brother-in-law’s apartment about 15 km away. I cannot help but thinking that there was too much building activity. The number of employed in the service sector was staggering. While I can understand the employment growth in the food and retail sector, the number of people cutting hair, giving massages, doing nails, etc., seemed excessive. Given the nature of the businesses and the manner of payment, I do not understand how the government can capture the number of people in the service sector.

        I could not help seeing some massive changes in the seven years since I was last there. Entire sections of the city of Xi’an had been torn down and newer buildings had gone up. Beijing and Shanghai showed similar changes. The city government seems to have figured out that the ancient gates were not meant to handle the increase in vehicle traffic so it decided to build a subway. Road construction seems to be going strong and is producing freeways that are much better than the ones that I normally drive in Ontario. The new airport terminals in Shanghai, Xi’an and Beijing were excellent compared to what I have seen in Canada or the US.

        It is because I see some of the same problems that you do that I think that the government will make some serious investments in infrastructure projects. The funds are certainly available as the bureaucrats seem to be worried about the viability of the USD. I had lunch last spring with a former AVIC official who I met while I worked in China. The first thing he asked about was the comment that Paulson had made about the DTC. He was worried about FTDs and was concerned that there was a great deal more fraud in the US markets than the media and regulators let on. At the time he did not seem worried about a USD devaluation because he thought that the government could hedge by borrowing a great deal for infrastructure projects and by buying up natural resource companies that had a lot of long term debt. He was interested in energy and base metals producers that had reserves in the ground in areas that the Chinese are comfortable.

        My concern comes not from the possible economic contraction but from an explosion in prices that may trigger that contraction. Given the number of projects on the books I can’t figure out how the Chinese will get the iron and copper they need to build their power grid, railways and power generating stations. While power use will go down as some energy intensive industries contract in some parts of the country it will be needed in may others that do not have access to as much electricity as is required. I also worry about unrest due to food price increases. With the Canadian wheat harvest looking a bit shaky right now, Argentina’s weather problems threatening to reduce acreage under cultivation, and the food-to-fuel programs diverting corn to ethanol production we could have some price pressures in the lte fall that could create some difficulties for the Chinese government. Unlike Americans or Canadians, the Chinese spend a big chunk of their income for food. That means that price increases will take a large toll, particularly among poorer groups.

        My other concern is the fate of the USD. If the dollar begins to slide as investors and governments figure out that Obama will have to resort to the printing press and let inflation take care of the American debt problem domestic consumption growth for the Chinese may not be enough, even if the rising RMB allows more consumption due to greater affordability. (Please note that I am having a hard time writing the last bit because the Chinese seem to have as big a love of the printing press as Westerners.) If that is the case we need to have a lot more in physical bullion than we currently do. No matter which side one may be on the inflation/deflation debate, gold may be the most prudent bet.

    2. Bill says

      I agree with you on the long term picture. But on the short term is it not important to be a contrarian sometimes…

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