Proceed with caution, guru warns

A longtime admirer of China, top economist says he is concerned about the country's rising level of debt

Ruchir Sharma insists he writes for the people who have to live with the consequences of their decisions.

The chief global strategist at Morgan Stanley Investment Management certainly has no shortage of readers. His latest book, The Rise and Fall of Nations, is already a New York Times international bestseller

"Books about global macro economics and political ideas are often typically written by academics and have zero practical value," he says.

"They often have long time horizons and don't look at what the world is going to look like in the next five or 10 years, which I think most people are concerned with. I wish I could have a client to whom I could say, 'Hey, come and check out my performance in 20 years from now'. It just doesn't work like that."

Sharma, who is also a regular contributor to the Wall Street Journal and Washington Post and was speaking from his home in New York, is something of a celebrity economic guru.

His first book, Breakout Nations: In Pursuit of the Next Economic Miracles, also a best seller, firmly pricked the hype bubble surrounding emerging nations, questioning the performance of the BRICS economies such as his native India, Russia, India, Brazil and South Africa.

Last time, he argued that China was the only emerging economy likely to break out of the so-called middle-income trap, but in his new book, he is less optimistic about the immediate outlook for the world's second-largest economy.

"My take on China is that it is a country that I grew up completely in awe of. I say in the book, however, that I am now worried about the pace of increase of its debt level," he says.

"At the peak of the US housing bubble in 2008, it used to take $3 of debt to create $1 of GDP growth in the United States, which is considered to be extreme. In China this year, it is taking $4 of debt to create $1 of GDP."

The strategist, who was brought up in India (where he remains famous) but moved to the US 14 years ago, is now not as confident China will find it so easy to escape the middle-income trap, as he earlier predicted. The government's own target is to achieve high-income status in 2020 by doubling its 2010 GDP.

"I think the target is a bit of a risk just because of the way the debt level has exploded from 2009 onward. So the probability of China achieving that target has declined. It might still happen, but the whole issue is that old driving slogan - it is better to arrive late than never at all."

The book, which as usual is brimming with interesting perspectives, comes up with 10 criteria on which a country can be judged. They are: demographics; whether a country is ready to embrace reform; wealth inequality; the government's role in economy; whether a country is capitalizing on its geographic location ("The Geographic Sweet Spot"); manufacturing investment ("Factories First"); inflation ("The Price of Onions"); whether its currency is over- or undervalued; debt; and the hype factor (how the country is portrayed by global opinion makers).

"Not all of them are original to me," says Sharma. "There is a body of work done on things like low inflation or high investment. Some of it is original, like the entire chapter on The Kiss of Debt, focusing on the five-year time horizon and the increase in debt as being what matters. The idea of good and bad billionaires (wealth inequality) is a totally original concept I've tried to create. It has just not all been strung together in this format, and that is what I have tried to do here."

He believes that China, in terms of its billionaires, has largely benefited, with a number - such as Alibaba's Jack Ma - playing an influential role in the economy. The top 10 Chinese tycoons control just 1 percent of GDP in China, compared with 12 percent in India.

"The share of billionaires in the economy is at a manageable level. It's not like Russia, India or Mexico where the share of wealth becomes just too large and sows the seeds of political resentment," he says.

Sharma says the way the government has retreated from many parts of the economy over the past 30 years has also been of benefit to China.

"It went from being a very big obtrusive all-controlling state to one that has systematically reduced its share (of the economy) over time. And that has done very well for China. You have, however, seen an increase in state involvement to try and shore up economic growth as part of the stimulus."

Sharma, also says that with recent moves like the Belt and Road Initiative, the government has tackled the problem that the west of the country is not in a geographic sweet spot, being handicapped by being landlocked.

"With the whole Silk Road project, China has made use of its geography. China has really been very good about opening up its borders compared to other countries in the region, such as India."

Sharma says China, and Asia as a whole, have proved that to have a successful economy it is important to put "factories first" and have a manufacturing base, in contrast to Africa and South America.

He does not believe, as some argue in Africa, that an economy can easily move from agriculture to services in one fell swoop.

"Although it sounds theoretically OK, we just haven't seen any evidence of it so far. So, for now, I would say factories first."

Sharma, an important Wall Street figure at the center of one of the top financial institutions in the US, says some of the rhetoric that has come out of Trump Tower about China does not stand up to scrutiny, particularly in regard to it being a currency manipulator.

"Anyone who knows the world knows that the Chinese currency is basically overvalued and not undervalued," he says.

The investment strategist says it is difficult to know what 2017 will bring but he says it is wrong to assume that China can continue growing year after year without encountering a setback at some point.

"In the past 100 years the United States suffered from a dozen recessions and a Great Depression and has still managed to be the premier economy in the world. It is perfectly reasonable to expect that China will have downturns or even recessions. That's just the laws of economic nature."

andrewmoody@chinadaily.com.cn

(China Daily European Weekly 12/09/2016 page32)