The Man Who Called the China 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.

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]

I shouldn't say China will have negative growth, but 9.3 is ridiculous. Last week we told clients that [we expect] 4 to 5 percent growth in China next year, but that there was a 30 percent probability that growth will be negative. We have benchmarked growth forecasts for Asia next year [based on] the 2000-01 recession, which was pretty mild. We're [expecting] no more than 2 percent growth for the region.

The consensus view is that the global economy desperately needs rebalancing whereby Asia consumes more and the United States saves more. Do you agree?
Americans are not going to spend above their means anymore, which automatically means that they're going to save more, which means that demand for what Asia produces is going to decrease. Whether that then gives a scope for Asians to spend more is really a big question. The premise is right; if they don't, the global economy goes into a much deeper downturn. But it's very difficult to tell any bunch of people what to do.

What makes Asian households so reluctant to consume?
Two things happened: the Asian crisis engendered a much higher degree of conservatism and a thrift mentality, and the dismantling of the social-security safety net in China did exactly the same thing there. We ended up with a much thriftier region, and we're going into this crisis with people in a nonspending mode.

How should Asian governments respond?
It's tough to reverse something you've encouraged for a long time. And many countries in this region have encouraged exports and kept their exchange rates too low. [I worry that] they're going to make [the global imbalance] even worse by depreciating their currencies further. We've had 20 to 30 percent depreciation in most Asian currencies over the last year. A true effort toward a different growth model would be to have no depreciation or even some appreciation [against the U.S. dollar]. But that's just not in the cards at the moment. [Asian policymakers] can't see their own domestic economy and its actors as the answer to their problem. But in natural fact they are.