China still a very safe bet
A high-profile strategist says China's strong growth will continue, despite concerns around higher inflation, over-leveraging in the banking system, and fears the Chinese currency will be allowed to rise. He thinks there is no clear and present danger for Australia.
High-profile investment strategist, Byron Wien, admits that he's surprised at the extent of the anguish over Australia's $50 billion budget deficit.
"You people are so upset about the budget position. There isn't an American who wouldn't envy your deficit.”
Wien, who is vice-chairman of the giant US asset manager, Blackstone Advisory Partners, also brushes aside concerns that China's economy could falter, which would send commodity prices plunging, and put a huge hole in the Australian government's tax revenues.
The Chinese economy, he says, is growing at close to 10 per cent a year, and "my view is that China will continue to grow at that rate.”
Wien says there are two main criticisms that people make of the Chinese economy. The first is that housing prices are inflated. The second is that the country's banking system is too highly leveraged.
"To some extent, both of these conditions exist”, he says. "But I don't think there is clear and present danger.”
Wien concedes there is evidence of overbuilding at the top end of the Chinese property market, but he says there's no need to be concerned about overbuilding across the entire housing sector.
Similarly, he dismisses criticisms that the Chinese banking system is over-leveraged. "People don't understand the difference between a centrally controlled authoritarian economy and an open market democracy. China has achieved its objectives of growing faster, and developing its infrastructure, more rapidly than any other country in the history of the world. They couldn't have done that without extending credit and having an undervalued currency.”
The US has long complained that China's policy of keeping its currency, the yuan, artificially low gives Chinese goods a cost advantage on world markets. However, Wien thinks that the Chinese may be on the brink of allowing its currency to rise.
"The two biggest problems that China has at the moment are inflation, and the fact that its economy is growing too fast. They could deal with both problems by revaluing their currency. It would certainly dampen inflation and slow the rate of growth.”
But, he adds, China certainly won't make this change in response to US criticisms of its undervalued currency. "They may independently take that route as a policy step. I definitely think we're going to see some progress this year, and major changes down the line.”
Still, Wien concedes that many people – including hedge fund manager, Jim Chanos, who argues that China is in the middle of a major speculative bubble – challenge his optimism on China.
"There's sort of a view that China is forming a bubble, and that all bubbles inevitably come to a bad end. But China has accomplished more in the last 35 years -since the death of Mao - than any country in the history of the world. Maybe it will end badly, but it's not going to end badly soon.”
Wien is similarly upbeat on the growth prospects for the US economy. There was some disappointment that the US economy only grew by only 1.8 per cent in the first three months of the year, but Wien points out there were a number of factors that undermined growth, including heavy snow storms across swathes of the US, the Japanese earthquake and tsunami, as well as political upheaval in the Middle East and North Africa.
Wien expects the US economy will achieve a growth rate of 3 per cent or better for the rest of the year. "I'm optimistic this is going to be a pretty good year for the US economy.”
As a result he does not expect the US central bank will embark on a new bond-buying program when the existing $US600 billion program – dubbed QE2 – comes to an end in June.
But, he warns, the end of QE2 could prove a rocky time for markets.
"QE2 went to financial markets, it fuelled the rally we had starting last September. I don't think there's a need for QE3. But when QE2 ends in June, markets may have a pull-back.”
Finally, Wien is far from optimistic that a solution will be found to the yawning US budget deficit any time soon, even though Democrats and Republicans will likely reach a deal to lift the debt ceiling.
"I don't think the government is going to come to a stand-still. I think there will be a compromise, some kind of agreement on the budget deficit,” he says.
"But I don't feel the agreement will go far enough. They'll need to do more to cut the budget deficit.”
"You people are so upset about the budget position. There isn't an American who wouldn't envy your deficit.”
Wien, who is vice-chairman of the giant US asset manager, Blackstone Advisory Partners, also brushes aside concerns that China's economy could falter, which would send commodity prices plunging, and put a huge hole in the Australian government's tax revenues.
The Chinese economy, he says, is growing at close to 10 per cent a year, and "my view is that China will continue to grow at that rate.”
Wien says there are two main criticisms that people make of the Chinese economy. The first is that housing prices are inflated. The second is that the country's banking system is too highly leveraged.
"To some extent, both of these conditions exist”, he says. "But I don't think there is clear and present danger.”
Wien concedes there is evidence of overbuilding at the top end of the Chinese property market, but he says there's no need to be concerned about overbuilding across the entire housing sector.
Similarly, he dismisses criticisms that the Chinese banking system is over-leveraged. "People don't understand the difference between a centrally controlled authoritarian economy and an open market democracy. China has achieved its objectives of growing faster, and developing its infrastructure, more rapidly than any other country in the history of the world. They couldn't have done that without extending credit and having an undervalued currency.”
The US has long complained that China's policy of keeping its currency, the yuan, artificially low gives Chinese goods a cost advantage on world markets. However, Wien thinks that the Chinese may be on the brink of allowing its currency to rise.
"The two biggest problems that China has at the moment are inflation, and the fact that its economy is growing too fast. They could deal with both problems by revaluing their currency. It would certainly dampen inflation and slow the rate of growth.”
But, he adds, China certainly won't make this change in response to US criticisms of its undervalued currency. "They may independently take that route as a policy step. I definitely think we're going to see some progress this year, and major changes down the line.”
Still, Wien concedes that many people – including hedge fund manager, Jim Chanos, who argues that China is in the middle of a major speculative bubble – challenge his optimism on China.
"There's sort of a view that China is forming a bubble, and that all bubbles inevitably come to a bad end. But China has accomplished more in the last 35 years -since the death of Mao - than any country in the history of the world. Maybe it will end badly, but it's not going to end badly soon.”
Wien is similarly upbeat on the growth prospects for the US economy. There was some disappointment that the US economy only grew by only 1.8 per cent in the first three months of the year, but Wien points out there were a number of factors that undermined growth, including heavy snow storms across swathes of the US, the Japanese earthquake and tsunami, as well as political upheaval in the Middle East and North Africa.
Wien expects the US economy will achieve a growth rate of 3 per cent or better for the rest of the year. "I'm optimistic this is going to be a pretty good year for the US economy.”
As a result he does not expect the US central bank will embark on a new bond-buying program when the existing $US600 billion program – dubbed QE2 – comes to an end in June.
But, he warns, the end of QE2 could prove a rocky time for markets.
"QE2 went to financial markets, it fuelled the rally we had starting last September. I don't think there's a need for QE3. But when QE2 ends in June, markets may have a pull-back.”
Finally, Wien is far from optimistic that a solution will be found to the yawning US budget deficit any time soon, even though Democrats and Republicans will likely reach a deal to lift the debt ceiling.
"I don't think the government is going to come to a stand-still. I think there will be a compromise, some kind of agreement on the budget deficit,” he says.
"But I don't feel the agreement will go far enough. They'll need to do more to cut the budget deficit.”
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