China will respond too late to avoid recession: Citigroup

AUGUST 28

NEW YORK — China is sliding into recession and the leadership will not act quickly enough to avoid a major slowdown by implementing large-scale fiscal policies to stimulate demand, Citigroup’s top economist Willem Buiter said.

The only thing to stop a Chinese recession, which the former external member of the Bank of England defines as 4 per cent growth on “the mendacious official data” for a year, is a consumption-oriented fiscal stimulus program funded by the central government and monetised by the People’s Bank of China, Mr Buiter said.

“Despite the economy crying out for it, the Chinese leadership is not ready for this,” Mr Buiter, chief economist at Citigroup, said in a media call hosted yesterday (Aug 27) by the Council on Foreign Relations in New York. “It’s an economy that’s sliding into recession.”



Premier Li Keqiang is seeking to defend a 7 per cent economic growth goal at a time when concern over slowing demand in China is fuelling volatility in global markets. The true rate of expansion “is probably something closer to 4.5 per cent or less,” Mr Buiter said.

Li has repeatedly pledged to avoid stimulus similar to the one following the global financial crisis in 2008 that led to a surge in debt for local governments and corporations.

Data Accuracy

Some economists and investors have long questioned the accuracy of China’s official growth data. When Li was party secretary of Liaoning province in 2007, he said that figures for gross domestic product were “man-made” and therefore unreliable, according to a diplomatic cable published by WikiLeaks in 2010. The median estimate of 11 economists surveyed by Bloomberg earlier this month put China’s first-half GDP growth rate at 6.3 per cent, compared with the official figure of 7 per cent.

“They will respond but they will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2 per cent — which is in my definition a global recession,” said Mr Buiter.

The global economy will expand by 3 per cent this year, while China’s is forecast to grow 6.9 per cent, the slowest pace in a quarter century, according to economists surveyed by Bloomberg.

The boom and bust in the Shanghai Composite Index, which more than doubled in about a year before a selloff erased US$5 trillion (S$5 trillion) in market value in two months, is raising questions about “the competence of the Chinese authorities as managers of the macro economy,” Mr Buiter said.

The authorities first cheered the stock market rally “because quite a few of the local pundits believed that this was a great of deleveraging way without paying for the corporate sector to have a stock market bubble,” he said. “And then of course the rather panic and incompetent reaction ensued in response,” Mr Buiter added in reference to the unprecedented government intervention to support share prices.

BLOOMBERG