The turmoil in the Chinese stock market and the Beijing government's shaky response is just a speedbump - albeit maybe a "long speedbump" - and China's economy will continue to grow, according to David Atkinson of City National Bank. Speaking this morning at a LAWAC Global Café breakfast meeting, Atkinson said China is trying to change from a predominantly export-based economy to a consumer-driven economy but the ruling Communist Party is finding it hard to give up some of its control. "There's a lot of deliberation that goes along with doing this," said Atkinson. "The history is they are very, very deliberate and very careful about what they do."
Atkinson, who is Senior Vice President at City National Bank and is in charge of foreign exchange and market research, explained that the stock market run-up in Shanghai was caused by companies seeking more capital which they couldn't get from bank lending. He said Chinese investors poured into the stock market by borrowing on the margin to buy stocks. "There are 80 million individual stock-market investors in China: that is more members than the Chinese communist party!" But when that bubble began to burst this summer, the government began to panic. They used government funds to try to prop up the stock market and blocked new companies coming to the market. "Everything they've thrown at it hasn't been able to fix it," said Atkinson. The Shanghai market has dropped by more than 40% since June - and by 22% just in the past four days. Underlying the stock market crash are broader economic problems including an unexpectedly steep drop in China's exports. "The price of labor in China has come up," causing manufacturers to look at other countries like Vietnam, Indonesia and Bangladesh. This is why China is tempted to devalue the yuan despite its stated intention to let the Yuan float freely. "They're not ready" to let it float, said Atkinson.
However, China already now represents 15% of the world economy and Atkinson thinks long-term prospects for China are good. "I'm very bullish on China in general," said Atkinson. "I've been supportive of the efforts of Xi Jinping. It's going to take massive efforts to change their economy. It's going to take about 10 years to get that done and I think that's their time frame."
Atkinson predicted that China would now take "baby steps" as they try to find ways to reform their economy without giving up too much control too quickly. He recounted a story about Chinese nationalists trying to block a Japanese advance in 1938 by bursting a dike in the Yellow River - the Japanese army marched around the flood but the flood killed hundreds of thousands of Chinese peasants. "If a mistake is made in China," said Atkinson, "it's a bad mistake."
Looking at the U.S., Atkinson said that given the current healthy state of the economy, the "federal funds rate should be 2, 3 or even 4%." However because of all the recent quantitative easing, everyone has gotten very used to low rates which are now 0.25%. "And now people like Larry Summers (former Treasury Secretary) are saying "it would be a disaster to raise rates....everyone is so scared right now," said Atkinson. "A lot of big banks are changing their forecast from September to spring 2016 for a rate hike," he added. "It's amazing we've gotten to this point where we can't get out of monetary easing." Asked about the strengthening of the dollar, Atkinson said it's an "interest rate driven story" and so in the short term, it will depend on what happens in September. Longer term, the dollar will "stay fairly strong going into 2016."
On Greece, Atkinson said the current bailout won't work unless they get some form of debt-relief as the IMF has observed. "No one believes Greece can pull out of their debt. The country can't follow through on the reforms, and leaders know they will need to adjust."