Burton Malkiel Is Bullish on China, Says U.S. Double-Dip Unlikely

Burton Malkiel, the Princeton professor, author of the seminal “Random Walk Down Wall Street,” and the champion of index investing, is bullish on China. In a speech Wednesday night at the New York Stock Exchange, hosted by Guggenheim Investments, Malkiel laid out his case for why China will continue its rapid economic growth, argued that most investors are underweight China, and suggested ways to invest in China.

Beginning by contrasting the American and Chinese economies, Malkiel said that  “I’m not negative on the U.S.,” that “my guess is there will be no double dip” recession, and that while he expects “some GDP recovery” in the third quarter, the U.S. economy “will remain sluggish.” Over the longer term, however, he argues that “too much debt is associated with poor economic growth.”

“We’re over-indebted,” Malkiel (left) said, pointing out that before the housing bubble, American consumers had $0.33 of debt for every $1 in income, but that after the bubble, “we’re at $1.33 of debt for every dollar of income.” The anemic pace of housing starts, he suggested, is “unlikely to change soon,” and that American financial institutions “still need to deleverage and recapitalize.” Looking at the overall growth and indebtedness of developed countries, he noted the 100% ratio in the U.S. of debt to GDP, developed Europe’s similar levels of indebtedness and that “Japan is a basket case” at 150% debt to GDP.

Among developing countries, that ratio stands at 60% for India and Brazil, but only 16% for China. “That’s why I’m enthusiastic about China,” he said bluntly. As for economic growth forecasts, he admitted that China “may not make” the 9.6% growth that the IMF has predicted for China in 2011, but forecast 7% to 8% growth for China from 2012 to 2014. “I’ve always been wrong on forecasting China” economic growth, he said. “I’ve been too pessimistic.”

One of his main reasons for forecasting continue growth in China is because, he said, “all the growth so far has been in the east of the country,” including the capital of Beijing and Shanghai, while the center and west of the country is “undeveloped and dirt poor.” It’s also where there is considerable social unrest, he admitted.

From a practical viewpoint, the Chinese government needs growth to continue in the central and western parts of the county so it can stay in power. “The government knows exactly what it’s doing with its infrastructure investments” and said that the Communist Party leadership will be successful because of the Chinese culture that “reveres education,” has a strong work ethic and is entrepreneurial. He called the late Chinese leader Deng Xiopeng “remarkable,” saying he “unleashed” the power of this Chinese culture that has resulted in China’s unprecedented growth.