Investor Q&A

“You thought this was bad…”

Marc Faber discusses the rise of China – and the even bigger crisis ahead

Faber: "China and the US are on a collision course"

Legendary bear, Marc Faber has been vindicated by the financial crisis.

Here, the Asia-based author of the Gloom, Boom and Doom Report discusses the rise of China, its decoupling from the US export market and the brewing crisis that the veteran Swiss investor sees ahead.

Are you bullish on the Chinese renminbi?

Yes, the renminbi is an undervalued currency and there is a chance that over the next 5 to 10 years it could double in value against the US dollar.

Given China’s creditor status, how do you see the relationship with the US playing out in the coming years?

China has a very good chance of displacing America as the world’s largest economy – and is already larger in many sectors than the US.

When you have a rising economic power like China challenging a superpower like the US, then obviously tensions are inevitable. The superpower wants to contain the increase in influence and prosperity of China. As it becomes more important economically, the underdog, – China – will want to have more of a say in global affairs. So the relationship between the US and China in the long run is on a collision course.

But surely they need each other now. Aren’t their economies joined at the hip?

I am not so sure that China really needs the US, or for that matter Asia does. It is true that if Asia stopped its exports to the US, it would create a disruption in economic activity that would last 3 to 5 years, because the whole export sector to the US would fall by the wayside. But I think the damage for the US would be more significant than for China or Asia in the long run. American price levels would go up substantially if Asia wasn’t supplying the US with low cost manufactured goods. And if Asia was buying less American bonds, it is probable that long term US interest rates would also go up.

So you can see a scenario in the not-too-distant future where Asian markets grow so big, they no longer have to rely on the US?

As a percentage of Asia’s total exports, those to America are declining. And exports to other parts of the world and other emerging economies are growing. So the importance of America to the Asian economies has diminished and is probably overestimated by most people.

Over the last 250 years the Western world has grown tremendously rich; and largely at the expense of emerging economies. But in the next 10 to 30 years, the emerging economies, including North and South Asia, as well as Latin America, the Middle East and Central Asia, will grow at a faster pace. America’s share of global GDP will continue to decline.

So you’re upbeat on China’s prospects?

On the economy I am reasonably positive. But that is not necessarily the same as saying I need to invest in China. You can find more interesting companies in other countries in Asia, such as Thailand, Indonesia and Australia.

I don’t think that Chinese valuations are very attractive. And in my opinion there is still a significant lack of transparency in Chinese companies, and a very heavy government involvement in the corporate sector.

There was a major correction in Chinese stocks last week. Is that a blip or something more serious?

The problem is this: throughout the world, governments have injected a lot of liquidity into markets through stimulus packages, rate cuts and quantitative easing. In China you have excess capacity, so the effect of the liquidity that is being created goes mostly into speculation in real estate and stocks. The stock market bottomed out on October 28 and since then has doubled. So a correction of 20% is nothing unusual.

The question is where do you go from here? Money supply has been growing at close to 30% per annum, and if they keep increasing loans and the money supply, then stocks will still go up.

However, it is likely that the big move in the China market is over. It can still go up to new, marginal highs. But there are lots of signs of a bubble and I would stay out of it.

China has been pouring a lot of stimulus spending into infrastructure. How do you view that type of spending?

If you build high speed train tracks or roads, they will benefit the economy for a long time. This type of infrastructure spending makes sense. It will improve productivity.

China, of course, has built a lot of infrastructure already, but there is still a long way to go. There are lots of cities that still require it. So this type of spending is a good thing.

What’s your view on China’s current growth spurt? Particularly the statistics showing stronger growth in the country’s interior?

The statistics have to be looked at with some grains of salt. The way they compile statistics is different from the way others compile statistics. And as demand ticks up, the question also has to be: demand from whom? Is it from state-owned enterprises that have been ordered to buy all kinds of stuff or is it actually genuine? That’s why I’m sceptical about the statistics China is publishing; and I don’t think the nation’s real GDP growth was anywhere near the 7.9% just published.

But the consensus view is that China’s stimulus plan has led the world out of recession?

The consensus two years ago was that the global economy was very sound. And what has happened is the worst economic crisis since the depression. So I am not so interested in the consensus.

Are you bearish?

On the global economy I am not too optimistic. We fell off a cliff, and I don’t think we will go back to the level of peak economic activity we had in 2006 and 2007 any time soon.

Do you forecast a ‘W’-shaped recovery?

Things may well deteroriate, because unless there are more stimulus packages and further quantitative easing, the impact of the fiscal deficit increase of 2009 will wane; and then it will depend on the private sector economy; and there I don’t see much improvement.

So back to China: do you therefore think exports will still face tough conditions in 12-18 months?

Yes, I think so.

But is the worst of the crisis over?

In the short and medium term, the worst is over. But I am extremely bearish because I see a bigger crisis looming.

The rotten financial system has not been cleaned, the Federal Reserve keeps printing money, and the US government’s finances get worse and worse. At some point people will be reluctant to hold US dollars. In the moment of ultimate crisis the whole derivatives market will fall apart and a new monetary system will come about.

Sounds bleak…

Yes, but that scenario could take 5 to 10 years to happen. It doesn’t change the fact that between then and now the Dow Jones could go to 100,000. It just depends how much money Mr Bernanke decides to print…


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