Perennially bearish investment guru Nouriel Roubini warns that the Chinese economy is about to hit a "brick wall".
Living up to his 'Dr Doom' moniker, he predicts that China's current investment model is unsustainable, and is creating expensive white elephants and unpaid loans. The 52-year-old, who once worked as an advisor to US Treasury Secretary Timothy Geithner, says it will end in "financial crisis and/or a long period of slow growth".
Roubini gained prominence among investors when he controversially predicted in 2005 that "a once-in-a-lifetime housing bust" would bring the "global financial system shuddering to a halt". With most investors bullish on China, the Turkish-born academic again finds himself at odds with the general consensus.
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Roubini's main gripe is that China's economy is too dependent on government investment and export-led industrialisation. At the moment, around 50% of GDP is reinvested in fixed assets, such as housing or airports.
The problem is, says Roubini, "that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity". He claims this is already evident in "empty airports highways to nowhere (and) ghost towns". When these under-used assets fail to make money the economy will be hit by a "staggering non-performing loan problem".
Pushing up investment in fixed-assets helped China avoid the crisis, and maintain growth during a weak export market. But just like "all historical episodes of excessive investment" the temporary growth rates will come "at a very high foreseeable cost".
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