Photo: Feng Li/ Getty Images
China’s economy grew 8.9% last quarter, the slowest pace in 2.5 years. And worries of a Chinese hard landing, defined as a sharp and sudden deceleration in growth, gained momentum last year.However, China has been proactive in its efforts to prevent a hard landing. It has fine-tuned its policies to curb inflation, boost domestic consumption, and prevent a housing bubble.
The Chinese government intervened heavily from 1989 – 1991 to cool its economy, causing real GDP growth to plunge to 4.1 per cent in 1989, from 11.3 per cent the previous year. It stepped in again in 1993. And some argue that this time around it’s no different, and the the government knows exactly what it is doing.
As the European sovereign debt crisis continues and the global economy struggles to regain steam, all eyes are on Asia’s engine of growth. So, we asked six top China analysts whether they saw a hard or soft landing scenario and what we should keep an eye on.
Photo: Bank of America-Merrill Lynch
Ting Lu, China economist, Bank of America-Merrill Lynch
A soft-landing in 2012, but with strong headwinds
We believe that the Chinese economy will have a soft-landing of growth in 2012, but with strong headwinds. We expect 8.6 per cent GDP growth in 2012.
There are two key elements to our view. First, we do see both external and internal risks to our growth forecasts. The biggest risk to our soft-landing call is a much worse eurozone sovereign debt crisis, while the second biggest risk is the falling property investment under the severe property tightening measures. Second, we believe the Chinese economy has a relatively healthy balance sheet and the government is flexible to adjust policy when it is necessary to deliver stable growth (moderate decline is allowed).
Photo: Societe Generale
Wei Yao, China economist, Societe Generale
A “bumpy” landing with a certain amount of pain“We think China will experience a bumpy landing, different from either soft or hard landing. Beijing can prevent a hard landing, given its control over the economy and its fiscal capacity. However, the economic imbalance after years of lop-sided, investment-driven growth are too great to be resolved without pain, and the fragile global recovery adds further to the difficulties. While external volatility and domestic social tensions call for faster reforms, various vested interests within the political structure could slow the pace of necessary reforms. Correction of existing asset bubbles, as well as the lack of pre-emptive and concerted reform planning, will make the process of landing very bumpy.
Another way to understand our “bumpy” landing view is that there is a certain amount of pain that has to be endured during its rebalancing towards a consumption-driven economy. Although the central government cannot make the pain go away, it is still able to spread the impact over several years, instead of having all existing investment bubbles blowing up in six to twelve months. In 2012, the housing market will be the first bubble to burst, while Beijing uses its power to sustain growth in other areas; and in 2013 and beyond, the government is likely to turn its attention to provide sustainable solutions to local government leverage and excess infrastructure investment. At the same time, private consumption will outperform, supported by rebalancing reforms and demographic trend, but will not be enough to make up the loss in growth resulted from correction of investments.
Given all the challenges at hand, we expect the Chinese economy to show below-potential growth and undergo recurring periods of great uncertainty in the next few years as economic rebalancing gradually takes place. A bumpy landing will also mean more volatility for the financial market.”
Alastair Newton, Senior political analyst, Nomura
A one in three chance of a hard landing
One in three probability of a ‘hard landing’ starting between now and the end of 2014 (where a ‘hard landing’ is defined as four consecutive quarters of growth of five per cent pa or below);
- Risk of such skewed to the latter part of that period. Between now and mid-2013 China’s leaders will be firmly focused on ensuring a smooth economic trajectory around the political inflexion point of the handover of power to the fifth generation leadership;
- They have plenty of fire power to ensure that that is so, even taking into account the possibility of a fairly sharp exogenous shock – although, clearly, a major exogenous shock (eg break-up of the eurozone, a military strike on Iran and consequent sustained oil price spike) could make keeping the economy on an even keel very difficult to impossible;
- Beyond mid-2013 China’s leaders will need to address significant structural and systemic challenges which will not be straightforward. However, since 1992 (ie Deng Xiaoping’s nanxun) they have shown an impressive ability to steer the economy through very choppy waters.
Photo: Fitch Ratings
Andrew Colquhoun, Head of Asia-Pacific Sovereigns, Fitch Ratings
China has the policy flexibility to engineer a soft landing
Fitch expects China’s economy to grow 8.2 per cent in 2012, with downside risk from the eurozone and from the unwinding of China’s own property boom. China has policy flexibility to respond to shocks. But the real question is whether China’s economy can manage the transition to a more sustainable consumption-led growth model in the longer term.
Photo: Moody’s Analytics
Alaistair Chan, Economist, Moody’s Analytics
A soft landing, but a hard landing is an ever-present risk
A hard landing remains an ever-present risk for China’s economy but our base case remains an orderly deceleration in growth.
The main near term risk for China is the property market. Anecdotes abound of falling prices in the primary market and falling transactions in the secondary one. In our view, this is wholly expected: the government is still clearly willing to bear the consequences of tight restrictions and a slowdown in the market to deflate the housing bubble.
Beijing has plenty of options if it decided to offset a housing bust. Its fiscal position is strong. Along with reversing the property market restrictions, it has the capacity to offset any fiscal problems arising from local governments. Banks would almost certainly need to be bailed out, but the government has had prior experience. Chinese wages are lower than Japan’s in the early 1990s, and there is a structural trend of higher inflation, which gives monetary policy greater room to move and reduces the risk of a liquidity trap.
Qu Hongbin, Economist, HSBC
Beijing has the fiscal flexibility to engineer a soft landing
With inflation quickly shifting to disinflation, growth stability tops the policy agenda with calls for more aggressive easing measures. Inflation, as measured by CPI and PPI, has fallen rapidly in recent months. But growth is also decelerating and the latest leading indicators point to a further slowdown in 2012. The European debt crisis and falling property prices will only add to downside pressure on growth. This means Beijing has to respond decisively to stabilise growth and the job market.
We expect the central bank will pursue across-the- board easing. As with the policy tightening cycle, we expect quantitative tools to be used… Second, we expect fiscal policy to be as, if not more, important than monetary policy. Total fiscal revenue surged nearly 27 % y-o-y in the first 11 months of 2011 and the central government’s net cash position has topped around RMB4trn (nearly 9% of GDP). This puts Beijing in a strong fiscal position to cushion a slowdown in growth. Watch for tax cuts for small and medium-sized enterprises (equivalent of around 1% of GDP), additional spending on public housing and ongoing infrastructure projects, and more subsidies for poor rural households.
We also expect the municipal bond trial to be rolled out nationally next year. Combined with the transfer of more funds from the central government, this should help finance public housing and mitigate the liquidity risk of local government debt. These measures, plus continued investment in existing infrastructure projects, should keep GDP growth above 8% in the coming years, although the crisis in Europe will probably slow export growth.
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