He Called The Bust

Apocalyptic forecasts are a dime a dozen these days. Yet Jim Walker—former chief economist for the brokerage CLSA and now head of the research firm Asianomics—started getting his dark visions two years ago. That's when he first warned that a global recession would end China's 30-year boom. A year later, he forecast that China's growth rate would slow to 5 percent by the end of '08, down from a white-hot 11.9 percent last year. It sounded radical then, but in recent weeks, JPMorgan, Credit Suisse and the Royal Bank of Scotland all released similar estimates. Walker spoke with NEWSWEEK'S George Wehrfritz in Hong Kong last week. Excerpts:

WEHRFRITZ: Back in 2006, you prided yourself in being " unfashionably negative " on the global economy. What did you see that other analysts missed?
WALKER: The key thing was the U.S. housing market. By late 2006, we were seeing significant downturns in residential investment [and] a drop-off in the way that it was financed, and we knew that problems were building. And the yield curve had inverted [making long-term debt cheaper than short-term debt]. Putting this together, we [concluded] that we were headed into a recession, and that it was going to be a pretty nasty one.

The implication for Asia being …
That because it's still heavily export-dependent, and because the real global consumer remained the United States, anything that was going to [reduce] demand in America would affect Asia pretty badly.

You ' ve said China is caught in a " malinvestment crisis. " Explain that.

Malinvestment means bad investment in a sense that once there is a normalization of monetary conditions, the cracks in the industrial and capital structures begin to show up. That's what's happening now in China. A boom is nearly always determined by how much credit and money has been pushed into an economy. And the question that everybody should be asking when credit and money are easily available is, "Are they properly priced?" If they're not, the likelihood is that people will spend on the wrong things in the wrong areas of the economy.
You've questioned growth forecasts issued by governments, agencies like the IMF and investment banks. Why?

I think they're all far, far too high. Most multinational agencies simply take government forecasts and don't do very much with them because those governments are their paymasters. Investment analysts are the ones I'm much more critical of. To a large extent, they're just justifying the buy recommendations they've put on stocks or on the region. That is the nature of the industry, but hopefully that is going to change. At the moment the IMF—despite its claims that it saw the global crisis coming—is forecasting 9.3 percent growth next year for China. The only thing I would say is, that if it had a negative sign in front, it might be closer. [Laughs]