Nouriel Roubini Is All Wrong About China

Shaun Rein, 06.15.11 (Forbes) - He bases his pessimistic forecast on phantom facts.

The famed bearish economist Nouriel Roubini has been making waves recently by siding with China bears like Jim Chanos and saying that China will run into big economic problems in 2013. To buttress his argument, he has been telling anecdotes from a recent trip to China.

He has been quoted by Reuters as saying, "'I was recently in Shanghai and I took their high-speed train to Hangzhou,' referring to the new Maglev line that has cut traveling time between the two cities from four hours to less than one. '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 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.'"

Roubini, who correctly predicted America's housing crisis, is no lightweight economist. If China were building infrastructure projects in triplicate, it might portend that China was overbuilding at a faster pace than Dubai. If that became the case, it could create problems that rarely end well, such as a credit-fueled real estate boom.

However, most of Roubini's conclusions are based on phantom facts, as is his evidence for why China will have economic problems. There is no direct flight between Shanghai and Hangzhou, nor is there a maglev train system connecting the two cities. Shanghai has two, not three, airports, and the last new one opened a dozen years ago, in 1999. Both the Hongqiao and Pudong airports have been adding runways and terminals because the airports are too crowded, contrary to Roubini's suggestions of emptiness. Pudong's passenger and cargo traffic grew 27% in 2010, to 40.6 million passengers. It is now the third busiest airport in the world in terms of freight traffic, with 3,227,914 metric tons handled every year.

That hardly sounds like an underutilized airport with wasted investment in triplicate. Many analysts have turned bearish on China's economy over the last few years because they are concerned about empty apartments, too much debt and overcapacity. However, like Roubini, these analysts surprisingly misunderstand basic facts about income, demographics and investment in these facilities, and they use data points that are simply wrong to lead to their conclusions.

The reality is that most of China's infrastructure spending has created greater business efficiency while maintaining stable employment numbers. There were indeed plans to build a maglev train between Shanghai and Hangzhou, but those plans were scrapped following analysis that indicated it would be a waste of money. Instead, high speed rails were installed. This is a sustainable investment because it improves the linkage between two cities with populations of 24 million and 9 million. Every time I have been on the trains they have been packed to capacity, and I can assure you I have been on them far more often than has Roubini.

Most of China's transportation projects are not like Japan's bridges and highways to nowhere i that connect big cities with hamlets. China' projects improve business efficiency, and they are needed in that still developing economy. China has not yet gotten to where Japan was when it started wasting money on infrastructure projects to get out of its deflationary cycle.

The Chinese government is also severely limiting the number of new automobile license plates it issues, to reduce pollution and congestion. Only 21% of those who applied for a license plate in Beijing in January received one. My firm, the China Market Research Group, estimates that 350 million Chinese now live in households that can afford automobiles, and gross domestic product per capita is rising 10% a year. Per capita GDP more than tripled to USD3,400 at the end of 2010 from $949 in 2000. As a result of the limits on new autos, there is major pent up demand for cars, as incomes continue to rise. Until the restrictions on auto buying are eased, if ever, the demand for high-speed comfortable trains will grow.

China is not immune to economic cycles. It will definitely go through rough patches in the coming years, and housing prices may in fact fall. Despite a relatively efficient bureaucracy, no government can stave off market forces forever, and problems are starting to arise. However, the headwinds are coming from raging inflation, a shrinking labor pool and a weak education system, not from over-construction in infrastructure spending, as Roubini argues. It is important that analysts use real, not phantom, data points to draw conclusions about China.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm, and is based in Shanghai. Follow him on Twitter @shaunrein.