China is heading for a debt crisis, and developing countries that export commodities are going to suffer terribly – or not so much – depending on who you agree with.
Michael Pettis is a professor of finance at Peking University in Beijing, known for his pessimism about China. He worked on Wall Street as an equities trader.
His gloom-laden message contrasts with the “conventional upbeat wisdom about China’s benign influence on emerging economies,” according to a report in BusinessDayLive.
Emerging-market economies including South Africa that rely heavily on commodity exports will be hit hard as Chinese demand slows significantly, Pettis said Wednesday on the sidelines of a conference in Johannesburg.
His opinions are not shared by another China heavyweight, Investec Asset Management strategist Michael Power, who said China was experiencing “natural economic growing pains.” Growth will be slower, Power conceded, but off an ever-growing base.
“Developing countries that export commodities are going to suffer terribly,” Pettis said.
China has been South Africa’s biggest trading partner since 2009 and is now the largest destination for exports of iron, steel, nonferrous metals and chemicals, according to Reserve Bank Deputy Governor Daniel Mminele.
Pettis predicts commodity prices will return to levels of 15 years ago. Iron ore fetched $200 a tonne two years ago, and is now about $120 a tonne. He expects it to drop to about $50 a tonne in the next four years as China reins in unsustainable investment spending.
China accounts for 60 percent of global demand for iron ore, 40 percent for copper and a “hugely disproportionate” 12 percent of global demand for commodities, he said.
After two decades of the highest investment growth recorded, China has run out of economically viable projects, he said, but it has continued to invest — funded by debt — to the extent that debt is growing faster than debt-service ability.
The only ending to this “classic investment-led growth miracle” story is an unhappy one: either a debt default or a lost decade where China will “grind away through very high debt levels,” Pettis said.
Power had a different view, arguing China is just changing gears and this won’t be achieved without a few bumps.
“The golden age of U.S. growth, from 1865 to 1914, was not achieved without seven recessions during that period,” Power said, although he is not expecting China to slip into recession.
Instead, he foresees an “awkward transformation” to a slower pace of growth in line with what the Chinese government wanted.
“Government has deliberately slowed down the pace and started to change the growth formula — more consumer spending, more services, less investment into industry,” Power said.
Pettis predicts China will follow the precedent set by 43 countries whose economies grew by 7 percent or more for 10 years since World War II.
“There hasn’t been a single case that did not end in a debt crisis or lost decade,” Pettis said, citing as examples the Soviet Union in the 1960s and Japan in the 1980s.