For those who are worried about the prospect of a Chinese slowdown hurting the world economy and bringing the six-year-long U.S. recovery to a halt, the leader of one of the nation’s biggest banks and the head of the world’s biggest industrial real estate firm recently provided some reassurance.
In a question-and-answer session at ULI’s 2015 Fall Meeting in San Francisco, John G. Stumpf, chairman, president, and CEO of Wells Fargo & Company, and Prologis chairman and CEO Hamid R. Moghadam both indicated that China’s recent economic deceleration is not as big of a worry as it might seem to jittery Wall Street investors.
Moghadam, whose company has been doing business in China for more than a decade, estimated that China’s economy continues to grow at a rate of 4.5 percent. That is significantly lower than the Chinese government’s official forecast of 7.0 percent and the International Monetary Fund’s prediction of 6.8 percent. But he said that the Asian giant’s recent slip after a quarter-century of astonishing growth was inevitable. “Nothing grows for 10 percent forever,” he said. “It would be bigger than the universe.”
Moghadam noted that when measured in purchasing power, the Chinese economy—which overtook that of the United States for the first time in 2014—remains the biggest in the world. He said that when it comes to Prologis’s specialty of developing, owning, and operating business logistics facilities, China still is a vastly underserved market with enormous room for growth.
“They’re at the very early stages of building out their logistics infrastructure, as they shift from export to domestic consumption,” Moghadam said. “We can be busy for the next 30 years and not meet what’s needed in that country.”
Moghadam did caution, however, that tensions in the South China Sea, where China has become embroiled with Vietnam, the Philippines, and other nations in a dispute over territorial claims to shipping routes and sites for energy exploration, could be a wild card that would cause further economic instability. “But the economy itself should be okay,” he said.
Stumpf said that since Wells Fargo’s business is primarily domestic, the bank has less exposure to the ups and downs of the Chinese economy. He said that Chinese investors are continuing to park their money in U.S. assets, though they have shifted to investing in real estate rather than purchasing government debt securities.
“Five percent growth in a big economy is still a lot of growth,” Stumpf said. “You’re going to see a few bumps and flat parts, as they shift from supply-side infrastructure building to demand side.”
Stumpf said that the biggest drag on U.S. prosperity is not Chinese instability, but the relative strength of the dollar against other currencies, which makes the price of U.S. exports less competitive in foreign markets. China added to that trend when it devalued the yuan by 2 percent in a surprise move in August; but last week, the South China Post reported that the yuan recently has been trading at a slightly higher price.
“The strong U.S. dollar takes a point off our growth,” Stumpf explained. “Think of our growth rate as 3.1 or 3.5 if we had a better international marketplace today.”
Stumpf also painted a generally positive portrait of the U.S. real estate sector. “We’re seeing the reurbanization of American cities,” he noted. “You go to almost any major city in America, and it looks like a crane convention. They’re rebuilding the private sector infrastructure of downtown corridors.”
In addition, he noted that manufacturing is growing in strength, with some companies that had relocated their operations overseas now returning to the United States. The auto industry in particular is showing strong sales, with projected sales of 17 million to 18 million vehicles this year, he said.
Stumpf was similarly positive about the real estate industry. He said that while homeownership has slipped from 70 percent prior to the 2007–2008 economic downturn to about 63 percent today, sales of both new and existing homes have been on the rise. A lack of inventory, which has forced prospective buyers to bid for homes in some hot areas, has stimulated more construction of apartment buildings to fill millennials’ need for housing. “I’m optimistic on the residential side,” he said.
Stumpf did identify one major weakness in the economy: Public sector infrastructure spending has not yet caught up to prerecession levels, he said.
“We’re pretty bullish on [the economy],” Stumpf said.
Moghadam was slightly more guarded in his assessment. He said that industrial real estate remains “muted” in the United States at around 2 percent demand and 1 percent growth. But the slight disparity still creates pricing power in the industry, he said.
Nevertheless, Moghadam said that the real estate sector is stronger than it was prior to the recession. Because financial institutions are subject to tighter regulations and loans are harder to come by, real estate developers are less leveraged than they were in the past. “This is not the old days, [when] people were running with 90 percent leverage and were at the beck and call of lenders,” he said. “Now, we spend time making sure it is all even and smooth, and we’re not overexposed at any point in time.”