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12.11.2013Is The Chinese Economy Slowly Strangling Itself?

What should investors do?


Nina Xiang, Forbes.com

This past weekend China released a bunch of economic indicators for October. But in China, interpreting economic data can be a futile task when the validity of the data is put into question.

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And it often is, as Patrick Chovanec, chief strategist at New York-based family office Silvercrest Asset Management and a long-time China-based economist, explains.

“For example, it’s getting harder and harder to interpret Chinese export numbers,” Chovanec says to me. “There is a disconnect between the reported Chinese export numbers and the freight shipments out from Hong Kong, which is masking capital inflows to China.”

So then, what should investors do?

The first thing is to stop being “schizophrenic” about the Chinese economy, to use Chovanec’s own word. “They see either the bad news or the good news, and say either everything is going to implode or everything is back on track.”

But beyond the numbers, he sees a credit-driven growth model that China is struggling to shift away from but with limited success.

China’s dependence on run-away credit growth to drive investment, and also to paper over past investments that have gone bad, means that the Chinese economy is slowly strangling itself, Chovanec says.

But it doesn’t mean that he is a total pessimist about China’s prospects. He is unwilling to write off the possibility that China’s new leaders will embark upon substantive and serious reforms. Because as he puts it, there is no other choice.

Listen or read my conversation with Chovanec here.


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