Monday, February 2, 2009

Jeremy Grantham on China

I encourage you to read the entire Grantham interview; yet his specific views on China are below.

Last year, a friend and I sat in on a lecture given by Eswar Prasad at Cornell University, on the renminbi and China's banking system. It began to dawn on us
that the emergence of China as a dominant economic power is quite possibly the greatest dogma in all of finance and economics, and anyone who says otherwise is labeled not a skeptic, but a heretic. (Or at least an idiot!)

Lawrence Summers, an economist, Presidential advisor and former president of Harvard University, remarked that “[China's] economic significance dwarfs the Industrial Revolution or the Renaissance.”

We will see whether or not Summers is correct. Either way, I have no entrenched view or vested interest. But there is no doubt that when it comes to global-macro speculation
– whether stock markets, currencies, commodities, or the wealth of nations – China is still the biggest game in town.

What is your bold prediction for the future?

Keying off the word "bold," my prediction is that China will be a substantial disappointment. The reason I say "keying off" is that this is far from being a certain prediction. But I have a strong hunch China will disappoint, and maybe even bitterly disappoint.

That's the nature of the hunch, I look at everything and my stomach tells me they've been extraordinarily lucky in the last 15 years. It's hard to separate good luck from talent. I have a suspicion that a lot of what other people see as skill was good luck. And that they have a difficult job, and under this stress their modest talent will be revealed. The modesty of their talent.

What are some ways they got lucky?

They got lucky that the U.S. decided to run a huge trade deficit when they needed to run a huge surplus for political reasons. And it balanced out, as long as we ran an equal deficit. They were presented with the strongest global economy in history in which to sell their cheaper products.

Everyone else seems to be quite happy [with China]; maybe they're right. That's why it's a bold prediction rather than a high-confidence near certainty.

You had mentioned that the Chinese are new to capitalism, so their bench is not very deep.

Are they really so much better that they can handle an economy growing at four times the speed of the U.S. with a lack of experience? It doesn't compute, but we will find out.

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.