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“Winter is Coming”

November 25, 2011

Last week, I appeared at The Economist China Summit in Beijing, on a “bulls vs. bears” panel, alongside Professor Li Daokui (a Tsinghua colleague and advisor to China’s central bank), Arthur Kroeber (founder of Dragonomics and highly respected China bull), and Huang Yiping (Peking University professor and economist at Barclays Capital).  You can read a quick English summary of the panel discussion here, courtesy of Dezan Shira & Associates.  The folks at Sina prepared a full transcript in Chinese, which you can check out here (or run the link through Google translator to read it in fairly decent English).

Although Arthur gamely agreed to play along as a “bear” for the morning, I don’t think his heart was really in it — which is totally understandably, given that he recently authored this thoughtful and well-argued presentation on “Why China bears are wrong.”  That left me as the only real “bear” on the panel, if “bear” means accepting the possibility that China’s growth could drop below 7% in the next several years. 

The main theme of my comments were “Winter is Coming.”  The phrase, as I explained, is a reference to the popular HBO TV series Game of Thrones (and the novels by George R.R. Martin), which depicts a medieval fantasy world in which summers and winters last for many, many years, alternating not over the course of a single year, but a lifetime.  After so many years of summer, many people begin to doubt whether winter will ever return, or remember what it is like.  One family, whose task is to guard the North, have a watchword:  “Winter is Coming.”  It serves as a warning, and a reminder, to be prepared for difficult times ahead — and in China’s case, that the current drivers of growth are unsustainable and a correction is coming (and, by the looks of it, is already underway).  I had already planned to introduce this theme when, a few days before the panel, I happened to come across this New York Times article on China’s real estate downturn, which concludes with a quote that capture this idea exactly:

But the real estate downturn has only just begun, Mr. Zhang said, adding, “We are on the cusp of winter, and we don’t know who will survive it and who will not.”

One of the  areas of substantial disagreement on the panel was whether the recent rash of bankruptcies in Wenzhou are an atypical, localized phenomenon (as Arthur and the others argued) or signs of a broader breakdown.  I argued that, if you look closely at what is happening in Wenzhou, what you see is highly representative of pressures and imbalances that are building across the Chinese economy and financial system (namely, the use of easy credit as a way of avoiding real economic adjustment, by fueling speculative growth).  I don’t think the credit quality of Wenzhou shadow lending is any worse than in the formal banking sector.  The only difference is, unlike China’s state-owned banks, entrepreneurs in Wenzhou don’t have the financial resources to roll over loans and pretend everything is fine when their loans go bad and they don’t get paid.  They are, I said, the “canary in the goldmine” (I meant to say “coalmine,” but as Economist reporter Gady Epstein pointed out, “goldmine” is actually more appropriate, so I’m sticking with that).  For anyone who wants to read more about Wenzhou’s recent problems, I highly suggest this article in TIME (“When Wenzhou Sneezes”) by Austin Ramzy.

All this week I’ve been in Paris, attending the Boao Forum, which is why I’ve been so terrible about updating this blog.  On Tuesday evening, we were invited to the Palais de l’Élysée (the French presidential palace) for a reception hosted by President Sarkozy.  He gave us a real fire-and-brimstone speech denouncing unregulated markets and greedy bankers — in perfect tune with the zeitgeist.  Keep in mind, this is a man running for re-election, who spent the last month desperately trying to hold together a deal to save the euro, and had just emerged from a frantic day of fending of questions about a debt downgrade warning by Moody’s.  He looked like he was feeling the pressure.  As I watched him (in a gilded hall not quite as resplendent as the headquarters of Harbin Pharmaceutical), I just couldn’t help thinking of that great scene in Jerry Maguire, where Cuba Gooding tells Tom Cruise, “You are hanging by a very thin thread, my man — and I dig that about you!”

There are a lot of really interesting data points I’ve been gathering over the past week or so, regarding the Chinese economy, that I have been meaning to share on this site.  But right now, I have to run to catch my plane back to Beijing.  I’ll post them this weekend.  In the meantime, I wish everyone a happy and restful Thanksgiving!

16 Comments leave one →
  1. November 25, 2011 2:05 pm

    “in a gilded hall not quite as resplendent as the headquarters of Harbin Pharmaceutical” – superb!

  2. November 25, 2011 3:28 pm

    Read an interesting article which I am unfortunately unable to attribute, stating the opinion that while China’s overall financial situation may appear solid, each of its provinces is running deficits and has debt levels akin to those of Greece (pro-rata). The centre will be hard pushed to bail out all the provinces which may fail to meet their debt obligations.

    • November 25, 2011 6:54 pm

      That was Larry Lang (Lang Xianping), a business professor from Hong Kong. He said that during a speech he gave in Shenyang (that each province was like a little Greece) but I think he was using that just as a broad comparison rather than an actual numerical comparison.

      Quite a lot of bold statements in that speech of Mr. Lang’s. Very interested to see what Prof. Chovanec thinks of his numbers, and whether or not he was being too dramatic.

    • Tron San permalink
      November 25, 2011 10:22 pm









  3. Kelly permalink
    November 26, 2011 4:26 am

    These videos are stories about China’s Ghost Cities from the Australian news service and Al Jazeera.

    China’s Ghost Cities – SBS

    similar story from Al Jazeera

  4. Tom permalink
    November 27, 2011 4:57 am

    I think the main problem with the Chinese economy is that it is so closely linked to those of Europe and the US. For the moment, all China can do is keep a close eye on Europe´s leaders and the Euro zone in general.

  5. Haris Usama permalink
    November 29, 2011 12:04 am

    This one is off the topic – But I am wondering if you would be giving your take on the recent NATO VS Pakistan Army Incident and China’s reaction to it. It would be interesting to know your perspective.

  6. FrParlentAuxFr permalink
    November 29, 2011 2:03 am

    Well well well. It seems that we have a classic banking crisis coming, that will be winter. But if we look at Europe with sovereign debt and currency crisis, or if we look at the US with prospect of destabilized debt situation leading to serious problem of currency, it looks like while China will have winter, Europe and the United States seem to be headed toward glaciation. As for foreign policy, China is right not to be aggressive, they have enough nukes and large army so noone would be foolish enough to attack China. A winter is bad, but it passes, but a glaciation…. hum. In a sense, during the first half of the XX century, the United States of America were not that aggressive, yet collected all the benefits of Europe fighting internally and falling apart with large inflow of capital and human capital. Yes CHina is still poor, that is not that bad, there will be a slowdown, not a mere soft landing and restructuring of the economy. I would rather have winter than glaciation.

    • December 27, 2011 12:18 pm

      The so called glaciation in the USA will cause the winter in China to turn into a glaciation. In the end everybody will be in glaciation, also called a 30’s depression. This one will be statistically worse, though it may feel better because we have the internet to spend the time.

  7. Jing Li permalink
    December 1, 2011 4:23 am

    Can’t help wondering what you think?

  8. December 4, 2011 11:51 am

    This piece takes issue with some of the insights offered on this bubble ( but do I really want to trust a writer who refers to Wang Mengkui as “Mr. Mengkui”?

  9. December 6, 2011 1:44 pm

    Look forward to seeing those data points and information that you had gathered on the Chinese economy


  1. Is Winter Coming for China’s Economy? | China Digital Times (CDT)
  2. Falling Dominoes « Patrick Chovanec
  3. China: Falling Dominoes « Föhrenbergkreis Finanzwirtschaft

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