Blackstone honcho sees no Chinese recession, WSJ not so sure

The head of the one of the top US hedge funds pooh-poohed talk of a hard landing and recession in China.

“The consumer demand — the middle class, for certain types of things — is doing pretty well,” said Steve Schwarzman, chief executive officer of New York-based Blackstone Group, in a television interview Monday on “Bloomberg” with David Westin and Stephanie Ruhle. “There’s been this almost panic vis-a-vis China, whether it was ‘hard landing,’ whether it was recession. I don’t think that’s going to happen.”

Blackstone CEO Steve Schwarzman

Blackstone CEO Steve Schwarzman

Yeah, there’s been a lot of talk about all that in the wake of negative economic reports, this summer’s stock market rout and the devaluation of the yuan on Aug. 11.

The economic slowdown has significantly affected commodity prices. Over the past year, the Bloomberg Commodity Index plunged 25%. Producers received a “harsh reality” check, said Schwarzman, until demand increases.

“The issue with commodities is about 50% of them went to China,” said Schwarzman on Bloomberg. “China has slowed in terms of building its infrastructure. If the demand is going to be soft and there’s more supply, the supercycle is over.”

Blackstone, the world’s biggest manager of alternative assets runs $333 billion. It owns shopping malls and real estate in China as well as stakes in consumer companies. The hedge fund, which Schwarzman co-founded, also has a $5 billion fund to buy more real estate and property-related assets in China and the rest of Asia, reported Bloomberg.

Recent reports of China’s economy slowing down have led to talk of a “hard landing” among pundits.

Investopedia defines a hard landing as: “An economic state wherein the economy is slowing down sharply or is tipped into outright recession after a period of rapid growth, due to government attempts to rein in inflation. A hard landing may be the undesirable consequence of efforts by a nation’s central bank to tighten monetary policy, so as to slow down growth and keep inflation in check. While a soft landing is generally the objective of such tightening measures, a hard landing may be the occasional – and unfortunate – result.”

The Pacific Investment Management Co., or PIMCO, forecast economic growth between 5.5% and 6.5% in each of the next four quarters. That’s down from the 7% growth posted in the second quarter. Is that a hard or soft landing? It’s definitely lower than what the Chinese government has been saying, but is that “hard?”

The Wall Street Journal says China is wrestling with the “impossible trinity,” the challenge of maintaining a flexible monetary policy, a fixed exchange rate and freely flowing capital at the same time.  Economists Robert Mundell and Marcus Fleming gave it that name in the 1960s, but others call it the  “unholy trinity” or the “trilemma.”

WSJ said that China isn’t lowering interest rates further, even amid signs of continued economic softness, because this could increase the amount of capital flowing out of the country in the wake of the yuan’s devaluation. And analysts expect the currency to weaken more.

“The price that China is paying for maintaining renminbi (yuan) stability is they have not been able to ease monetary policy more aggressively,” David Woo, head of global rates and currencies research at Bank of America Merrill Lynch told WSJ. “There’s a pretty good chance they’ll have to let the renminbi go, make it a free-floating currency.”

The “impossible trinity” sparked the devaluations of the Mexican peso in 1994 and the Thai Baht in 1997, which led to the Asian financial crisis that year. So, the fact that China is battling this “impossible trinity” has a lot of people very worried.

And we can see why, China hasn’t been very skillful at managing the economy over the summer.

Asia Unhedged has been calling for more monetary easing in China, even after the fifth-rate cut in a year in August. However, many analysts say any more easing would push the yuan’s value down further, sparking another wave of capital flight.

Let’s hope Schwarzman’s right.



Categories: Asia Unhedged, China

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