Riding the tiger in 2010?

2010 dawns with one or two considerable deals, notably from Bain Capital, that completed in the thick of the holiday season – you wonder what diehard would have been around to read the Bain press releases that came out around the New Year weekend. Still, we have a major firm ending up a difficult year with the completion of a major investment in one market, and kicking off the new year with a debut deal in another market. Good omens for 2010, you might say.

Yet macroeconomic policy issues could still derail the hoped-for smooth recovery into 2010. Economists in every region are cautioning that the year ahead could be harder to manage than the one just ended. As Stephen Gallagher, US Chief Economist at Société Générale, said recently, "now comes the hard part." The difficulty comes in exiting the immensely generous stimulus packages put in place over 2008-09. Macroeconomic managers and politicians will be under great pressure to ensure smooth exits, and will probably err on the side of caution, keeping the pumps primed as long as possible – not happy news for those private equity firms who found the glut of cheap stimulus capital a competitive challenge. And in China above all, the size and the comprehensiveness of the stimulus, not to mention the vested interests keen to keep the cash flowing, means proportionately greater difficulty rolling back the support, and more problems stored up for the future.

Yet did China need such stimulus in the first place? The famous dynamism and adaptability of PRC entrepreneurs could have driven the much-needed transition in the Chinese industrial base, away from export dependency towards a domestic-led growth model. Instead, many market players, the European Union Chamber of Commerce in Beijing for one, believe that the main result has been SOE overcapacity, and that misallocation of funding and resources remains a big difficulty for China. And others simply ask: if China was not suffering from the same ailment as the West, why is it taking the same medicine? At the very least, the PRC could consider reducing the dose and shortening the treatment period.

With a difficult period of industrial adjustment and a serious policy challenge ahead, China, and with it, Asia, might not be the safest place for one-way bets on a galloping Year of the Tiger. Even the China optimists are envisaging some interesting and unpredictable scenarios like the PRC moving into trade deficit. An awful lot of hopes and plans are riding on China right now – in a macro climate still recovering from the last fall resulting from over-dependence on one market structure and one direction. And everyone knows what the proverb says about riding a tiger …

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• Greater China