"Meaningful probability" of a China hard landing: Roubini

SINGAPORE Mon Jun 13, 2011 9:31am EDT

Nouriel Roubini, economics professor at Stern School of Business at New York University, attends a session at the World Economic Forum (WEF) in Davos January 26, 2011. REUTERS/Vincent Kessler

Nouriel Roubini, economics professor at Stern School of Business at New York University, attends a session at the World Economic Forum (WEF) in Davos January 26, 2011.

Credit: Reuters/Vincent Kessler

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SINGAPORE (Reuters) - China faces a "meaningful probability" of a hard economic landing and the euro zone is storing up problems for the future by not tackling the debt crisis head on, said Nouriel Roubini, the economist who predicted the global financial crisis.

He said U.S. Treasury prices, which have risen sharply as investors sought a safe haven from the euro area debt crisis and worries about a slowdown in the global economy, were fairly valued although he was cautious about U.S. equities.

New York-based Roubini is closely followed by Wall Street because he predicted the U.S. housing meltdown that precipitated the global downturn.

China avoided a hard landing during the global credit crunch but faces a downturn after 2013 as it will struggle to keep increasing fixed investments, Roubini said.

"There is a meaningful probability of a hard landing in China after 2013," he told a financial conference in Singapore.

Roubini said investment was already 50 percent of gross domestic product. Sixty years of data had shown that over- investment led to hard landings, he said, citing the Soviet Union in the 1960s and 70s, and East Asia before the 1997 financial crisis.

"I was recently in Shanghai and I took their high-speed train to Hangzhou," he said, referring to the new Maglev line that has cut traveling time between the two cities to less than an hour from four hours previously.

"The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is a also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou," he said.

"There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects."

U.S., EUROPE

Roubini said the risks confronting the global economy were evenly balanced. U.S. corporates had strong cash balances of some $2 trillion and the fact that the global financial crisis was not followed by a great depression were positives.

Persistent debt problems in advanced economies and the fact that U.S. consumption is being sustained by tax cuts and other government support were negatives, he said.

"It is a glass that is half full and half empty," said Roubini, head of an investment advisory firm that bears his name.

Asked about his outlook on U.S. financial markets, Roubini said he would stay defensive on equities but he did not believe there was a bubble in treasuries.

"At current levels, U.S. treasuries are fairly valued. I don't think there is a bond bubble," he said, adding U.S. 10-year bond yields at 3 percent or slightly lower were consistent with the low growth and low inflation outlook for the world's largest economy.

"Every time there is a global bout of risk aversion, and every other week there is another tail risk or black swan event, people dump the euro, dump yen and go to the safety of the U.S. dollar and U.S. treasuries," he added.

U.S. 10-year yields edged up just over half a basis point in Europe on Monday to 2.9802 percent. But they have fallen from 3.7 percent in February and 3.9 percent in April last year.

Other risks to the global economy include the debt problem in Europe's so-called periphery countries and the euro zone's reluctance to address issues head on.

Greece, Portugal and Ireland have been financially bailed out over unsustainable debt levels.

The EU is currently thrashing out a second package for Greece to ensure the country is funded through 2014 but many analysts believe Athens will struggle even then to avoid a harsh debt restructuring in the future.

"Kicking the can down the road, muddling through, extending and pretending that Greece will be better and you buy time... may make the collapse more disorderly over time," he said.

(Editing by Raju Gopalakrishnan and Neil Fullick)

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Comments (16)
deLafayette wrote:
{said Nouriel Roubini, the economist who predicted the global financial crisis.}

Oh, come-on. Will you PLEASE hire an economist with his ear to the ground.

Roubini was not the only one who saw there was an asset-value frenzy (aka “a bubble”). Most such bubbles don’t go “fzzzzst”, bu the big ones go “bang!” And with the run-up on realty prices in the US, it was very clear to all that this one would not just peter out.

Look at the history info-graphic here (taken from the Shiller housing market index): http://upload.wikimedia.org/wikipedia/commons/thumb/6/6c/Shiller_IE2_Fig_2-1.png/726px-Shiller_IE2_Fig_2-1.png

Now put yourself in any year from 2000 to 2005. Is the prediction that a bubble will pop all that difficult not to see clearly?

Jun 13, 2011 8:21am EDT  --  Report as abuse
calvinbama wrote:
The whole world just keeps on kicking. The UK is about the only major economy to try and do something about unsustainable debt. I think a global correction is in progress and has been for 2 weeks

Jun 13, 2011 8:27am EDT  --  Report as abuse
Greenspan2 wrote:
“There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects.”
This could actually be prudent foresight. It is less expensive and much easier to build roads and lay track through less developed areas in anticipation of high density growth and while funding is readily available.

Jun 13, 2011 9:35am EDT  --  Report as abuse
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