China's Economic Downturn Needs To Happen To Boost Consumption
ROBERT SIEGEL, HOST:
Now to the Chinese markets and what the crash there means for Americans. Chinese stock markets have lost nearly a third of their value in the past three weeks, despite intervention by the Chinese government to try to stop the slide. Patrick Chovanec has worked and taught in China. He's an investment strategist for a wealth management firm, and he also teaches part-time at Columbia University. Welcome to the program.
PATRICK CHOVANEC: Good to be with you.
SIEGEL: The White House announced today that the U.S. government - the treasury of White House is keeping an eye on the Chinese markets. Is what's happening there likely to affect typical American investors?
CHOVANEC: Well, few investors and few financial institutions in the United States have any direct exposure. The bigger question is whether it reflects some kind of turn in the Chinese economy that will impact the global economy. And there, I would say that China's stock market bubble and the bursting of that bubble is really more of a symptom of China's economic troubles then it is a cause. China's stock market became detached from its real economy, which has been deteriorating over the course of the past few years, and reality caught up to it.
SIEGEL: One measure of what you're saying is the Chinese stock prices, despite the big losses in the recent weeks, are still higher today than they were a year ago. So there really was quite a bubble.
CHOVANEC: They are higher, but this crash, I don't think, is over. And I think they're going right back down to where they started about a year ago. That would be consistent with what took place in 2007. China had a very similar bubble where the market tripled in the course of 12 months, and then in the next 12 months, it sold off right back to where was. So this is not something that's completely new for China.
SIEGEL: Do people who own mutual funds that say global markets or emerging markets or international markets - are they perhaps indirectly involved in this, in the Chinese stock markets?
CHOVANEC: They are exposed to the extent that they are invested in Hong Kong, and Hong Kong has also seen a sellout. But although Hong Kong prices rose in recent months, they did not skyrocket the way that domestic Chinese shares did.
SIEGEL: When the most recent Chinese bubble burst back in 2007, 2008, was the U.S. hurt by that?
CHOVANEC: It's hard to disentangle from the global financial crisis that then took hold. What's interesting is not only did it not really affect the U.S. economy very much, but it also really didn't affect the Chinese economy that much. The Chinese economy was still going like gang busters in the summer of 2008, even though the stock market had lost about two-thirds of its value.
SIEGEL: Are the Chinese markets irrational? I mean, is this - is this a rough place to invest?
CHOVANEC: They're very volatile, and they don't always trade based on fundamentals. And sometimes the government gives the impression that everybody can pile in and that it's risk-free and that the government will ensure that nothing happens. And this time around, the government has really pulled out all the stops in China to try to keep share prices from falling. They have gone in and actually bought very aggressively, but it hasn't stopped the falling prices.
SIEGEL: So you're saying, really, that if this is a dose of reality taking hold in the Chinese markets, there's something good about what's going on right now.
CHOVANEC: Well, look, China is undergoing a profound economic adjustment right now, away from one kind of growth model which relied on exports and investment towards another kind of growth model that is more balanced between domestic consumption and investment. And in the long run, that's going to be good. It's very disruptive. That being said, this is a transition that needs to happen. It's a transition that ultimately will be good for China, and it's a transition that's actually good for the rest of the world economy because it's really going to boost consumption from China.
That's - when the rest of the world looks at the Chinese economy, they shouldn't be so concerned about what the output levels or GDP levels are in China. They should care about whether China continues to consume. And China has produced more than it's consumed for years. It has all these reserves - $4 trillion worth of foreign exchange reserves. It can afford to consume more than it produces, so that's one thing that I think is actually going to be - this economic adjustment in China is actually ultimately going to turn China into a driver of consumer demand globally.
SIEGEL: Patrick Chovanec, thanks for talking with us.
CHOVANEC: You're welcome.
SIEGEL: Patrick Chovanec, chief strategist with Silvercrest Asset Management Group and also an adjunct professor at Columbia University School of International Public Affairs.
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