Dr. Doom sees no credit bubble in China
By Chris Oliver, MarketWatch
Last Update: 8:53 AM ET Sep 28, 2009
HONG KONG (MarketWatch) -- Contrarian economist Marc Faber is cautiously optimistic on the outlook for China, saying he sees few signs of a mismatch between supply and supply in the real estate sector, while its fiscal policies don't appear to be repeating the mistakes made by Western counterparts.
Still, stocks, including those in Asia could be under pressure for the rest of this year, falling perhaps as much as 20% as the U.S. dollar rallies amid resurgent fears of deflation fears, Faber was cited as saying by Bloomberg News in an interview Friday.
Longer term, though, he thinks high-quality stocks are one of the places for investors to take refuge from the affects of currency debasement and what he says is the inevitable inflation that will result from central bank's money printing.
Faber, better known by his moniker Dr. Doom, spoke at the CLSA Asia-Pacific Markets investor conference in Hong Kong. Faber, who operates a Hong Kong-based fund management company, is also author of the widely-followed investment newsletter Gloom, Boom & Doom report.
Faber famously went bearish on U.S. stocks shortly before the 1987 stock market crash and also forecast the 1997 Asian financial crisis. In 2002 he authored Tomorrow's Gold, which spelled out in prescient fashion the rise of Asia in the global economy.
"In China we don't have a credit bubble, we have an oversupply problem in some industries -- export industries and in some cases the real estate market," Faber said.
Chinese households have seen incomes rise along with real estate prices, unlike the U.S., U.K. and other Western economies where housing prices rose in the earlier part of the decade while wages stagnated.
"If you look at [Chinese] real estate prices as a percentage of income, it has been trending down, so affordability has actually improved," Faber said, citing Bank Credit Analyst data showing Chinese house prices relative to per capita income declining since 1994.
He's generally upbeat on the outlook for China and the region. The region's banking system has come through the financial chaos generally unscathed, and growth has slowed but not stalled.
"[China is] still growing, the same goes for India and for Vietnam, albeit from a low level. Compared to the western world they are in far better shape," he said
He concedes there's been a frenzy of capital investment in China in recent years, but expects the economy to gradually absorb the excess supply of shopping malls and office buildings that have sprung up across the country.
"As was case in 1994 in China, we have a glutted commercial real estate market, but eventually buildings filled up," Faber said.
Working off the excess will also be easier on the mainland where inventories of unsold new homes were at just two month's supply at the start of the year, compared to10-month supply in the U.S.
Housing demand, by some yardsticks, is also just in the early-growth stages. Rural residents moving to cities in search of better income -- a process known as urbanization -- has a ways to go, he says. About 40% of China's population resides in cities, up from just 29% in 1996.
In India, the figure is about 30%, meaning about 700 million residents reside in the countryside.
"As they come into the cities, they need roads, infrastructure, housing and so forth," Faber said.
"I believe the Asian region is in a kind of good position to grow, despite the huge slowdown in exports," Faber said.Too slow revaluation
Beijing, he says, made the mistake of allowing its currency to appreciate too slowly against the U.S. dollar.
Being abolished the yuan's peg to the dollar in 2005 and now allows the currency to fluctuate 0.5% from a central rate, which the People's Bank of China sets daily. Since the revamp, which included a 2% revaluation, the Chinese currency has appreciated about 21% against the dollar.
Looking ahead he sees the Chinese currency doubling in value against the dollar, following a pattern similar to the Japanese yen's appreciation against the greenback in the early 1970s.
Other Asian countries will follow China's lead in allowing their currencies to rise against the U.S. dollar.
"The other Asian currencies don't have a problem moving up against the dollar, they have a problem moving up against China and its currency, because they fear they will become less competitive," Faber said, adding that he's generally optimistic about the outlook for Asian currencies.
Faber says investors should acquire Asian equities on pull-backs as global growth momentum shifts to the East. Although he's skeptical about growth in the global economy, he remains upbeat on natural resources
"People in the West tell me, 'Oh the Asians, they save so much, they don't consume,' that's just total nonsense, on a per capita basis they consume less than westerners. But because of the large populations of 3.6 billion people, the aggregate consumption is huge," he said.
He's less of a fan of Chinese economic statistics. In reality, the economy is expanding at an annual rate of 3% and nothing like the 8% figure touted as the official target, he says.Looking inward
Asia, Faber said, won't be able to rely upon the export-led growth model this time around.
Global growth in the era ahead won't be anything like the synchronized boom that lifted all asset prices in unison from 2004 until markets began to unhinge as U.S. mortgage-related assets tanked.
Declines in the U.S. dollar are symptomatic of the underlying weakness of the U.S. economy.
"It's a fallacy to believe that strong economies have high inflation and weak economies have low inflation. The opposite in true, because in a strong economy, you don't need to print money," he said.
More likely, he says, Asia will look inward for growth. With its budding consumer markets, the region should be able to grow "comfortably" even in the event of lackluster growth in exports to the U.S. and Europe.
"I don't regard the collapse in exports as such a grave event or something that should disconcert Asia very badly," he said. "Asians should learn to grow more form within the region than depend on exports to essentially sick countries."
Households in emerging markets look set for a meaningful rise in wealth while those in most developed economies should see their fortunes stagnate and even decline.
That's a reversal he said of the last 200 years when more advanced nations saw their real GDP per capital rise 20 times "as the West ripped off poor countries".
"Your children who live in the developed world, in Western Europe and the U.S., they may not sink to bottom of the ocean economically," Faber told the crowd, "but in my opinion in real terms, real GDP per capita, it will not increase, if at all I think it will decrease slightly."
Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.