A year ago in Davos, Chinese Premier Li Keqiang told the World Economic Forum that his country could avoid a hard landing. And despite the fact that the Chinese stock markets have been killing fields of late, there are plenty of luminaries that will be trekking to Davos this week who still believe he is right about that — most notably, Nobel laureate Joseph Stiglitz and Credit Suisse Group AG Chief Executive Officer Tidjane Thiam.
That is some pretty bold confidence, considering that, between the Chinese equities crash and the great yuan selloff, global stock markets have taken a $5 trillion haircut. That’s trillion with a “T.”
“Sentiment has likely lurched far too quickly into a bearish posture and overhyped downside scenarios,” said Tim Adams, the U.S. Treasury’s former point-man on China and now president of the Institute of International Finance. “In the end, China will likely emulate every major economy and muddle through.”
But what will that muddling through look like for China? The country has already released data indicating that 2015 was the nation’s weakest year for growth since 1990. The nation also faces a $28 trillion debt overhang and an extremely weak currency. None of which are good signs from the world’s second-largest economy responsible for 15 percent of global economic output.
However, many experts have noted that, unlike other big economies, China’s heavily regulated stock market is less than wholly indicative of its home nation’s economic health and that other Chinese indicators, including the spread of employment and consumer confidence, are more in line with a positive Chinese picture.
“There’s always been a gap between what’s happening in the real economy and financial markets,” said Stiglitz, a professor at Columbia University who will be in Davos. “What’s happening in China is a slowdown by all accounts,” he said, “but it’s not a cataclysmic slowdown.”
“I really think people are overreacting,” noted Adam Posen, president of the Peterson Institute for International Economics.
Others have noted that this sort of course correction may be just what the Chinese market needs for long-term success as a capitalist nation.
“Yes, there will be growing pains; yes, they’re changing their model from export-led capital intensive growth to consumerism, but I think they’ll manage,” Credit Suisse’s Thiam said last week. “I went to China first in 1984 — anybody who’s been to China in 1984 can only be a China bull.”
But not everyone is quite so convinced that all will be well in China.
Citigroup Inc. Chief Economist Willem Buiter has pegged the risk that China will kick off a global recession at 55 percent, while U.K. Chancellor of the Exchequer George Osborne called out weakness in China as part of the “dangerous cocktail” of threats facing his economy.