Emerging Markets

China’s ghost towns should scare investors: BlackRock

Asset manager sees bumpy road ahead, as the PRC's building bubble finally bursts; materials companies will be hardest hit

China faces increasing challenges in maintaining its above-average growth rates, according to a BlackRock report.
“China’s old playbook of ‘invest and grow’ no longer works so well,” BlackRock analysts said in a report the money manager released on Tuesday.
China has to deal with unbridled credit growth, overbuilding and income inequality, BlackRock says.
The country “has been on an extraordinary [growth] path,” said Jeff Shen, BlackRock’s head of Asia-Pacific and emerging market equity, in an interview.
Expansion will continue, but “perhaps at a more moderate pace,” going from double-digit growth rates to around 7.5%, he said.
China’s growth has been dependent on subsidized credit and low wages, the report says. A needed shift to a more consumption-driven society, where savers are rewarded and workers can consume more, could be hamstrung by political hurdles.
China will shuffle its powerful Standing Committee of the Politburo this fall. But one prominent candidate, Communist Party leader Bo Xilai, has been ousted from power due to a murder investigation involving his wife, throwing the process into turmoil
But the biggest long-term threat remains the financial sector, still suffering from the explosion in credit growth resulting from Beijing’s 2009 stimulus, BlackRock says.
A government-engineered slowdown has created ghost towns in some areas, and an implosion in the construction-related sectors.
“The question now is: Can Beijing break a vicious circle of falling prices and sales” in the real estate sector, the money manager asks. “I think certainly there’s going to be a bit more volatile path ahead,” Mr. Shen said. “There’s been a … credit binge in 2009, the real estate bubble is bursting, especially in coastal areas, the export engine is facing uncertain demand globally [and] the political transition will not be as smooth as expected.”
Global consumer companies and high-end machinery makers are likely to be the best long-term bets on the China growth story, Blackrock concludes, while basic materials companies “are likely to suffer as China hits the ceiling for cement and steel consumption.”