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China consensus is dead wrong, says Duncan

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Please find below an interview posted on MarketWatch today.

Bangkok-based economist and author Richard Duncan says a chorus of economists pointing to a rebound in China may well be proven wrong, as he believes the nation is headed into a serious crisis.

Since the darkest hours of the 2008 global economic meltdown, China has made little progress in shifting its reliance away from exports, said Duncan, who is well known in Asia for his economic forecasting.

As a result, the Chinese economy is dangerously exposed to a renewed downturn in global trade, which Duncan sees as very likely despite a consensus that China is headed for sunnier times.

“I think China is in very big trouble,” Duncan told MarketWatch in a telephone interview, saying those focused on improvement in select data points such as manufacturing and retail sales are missing bigger trends in the global economy.

Global trade has contracted in each of last three months on an annual basis, according to the CPB Netherlands Bureau of Economic Policy, signaling what Duncan says is the sputtering out of the “recovery phase” that got underway in 2010.

“The rebound in global trade is beginning to fizzle out to the point now where we are hitting the zero line on growth in terms of trade, if not negative,” Duncan said. “China’s imports and exports are grinding to a halt as well.”

It’s only a matter of time before the weaker export environment results in Chinese newspaper headlines “about big job losses and pay cuts,” he said.

In fact, some signs backing up Duncan’s view are beginning to surface. China’s Vice Minister of Human Resources and Social Security Yang Zhiming, for example, told the state-run Xinhua news agency Monday that weakness in the job market is “starting to emerge.”

Duncan said his own visits to Shanghai and Beijing in April this year brought further confirmation of brewing trouble. While strolling in the nation’s capital, he counted a single construction crane, an unusual sight for a skyline normally cluttered with building activity.

“They have reached the stage where they realize there is no point in building skyscrapers that no one can move into, at least in these large cities, so the construction boom is rapidly fading out,” Duncan said.

On the financial side, Duncan believes that China’s banks are starting to feel the ill-effects from ramping up total system lending by 60% during the two years following the outbreak of the global crisis.

A third issue, according to Duncan, is that China’s push to transition to domestic-driven growth hasn’t gone according to plan, with little evidence of progress in boosting internal consumption.

Beijing appears to have the missed the window of opportunity to introduce a nationwide minimum wage that would have led to a meaningful rise in the spending power, he said.

“Now that the stimulus is fading, I reckon that the upward pressure on wages is also fading,” Duncan said.

And without strong demand at home, China’s fate remains very much tied to what U.S. consumers end up doing.

“My view has been that China’s miracle is driven by one thing and one thing only: its trade surplus with the U.S., which went from zero in 1990 up to now more than $300 billion a year,” Duncan said.

– Chris Oliver


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