Analysts have long warned about a hard landing out of China. It had grown too fast, and falling global demand for Chinese products was going to shove them off a cliff.
But seven years after the first signs of financial stress in the global economy, we have not seen anything remotely resembling an economic crash. As Bernstein’s Michael Parker and Flora Chang note, the Chinese economy is continuing to tick along at reported levels just shy of the targeted 7.5% GDP growth, even as the country’s energy demand has slowed.
“…The numbers might be fudged, but just how fudged could they be?” they write in a new note. “When you debate for 30 months whether an economy is having a hard or a soft landing, you already have your answer. If it’s still not clear after almost three years, it’s a soft landing.”
In fact, if you’re looking solely at energy demand, China may have more upside left in it. Parker and Chang produce the chart showing per capita consumption in major countries. China remains way behind:
The pair argue China will need to get this rate to at least European levels to become a fully developed economy — meaning it may have another 50% primary energy consumption growth per capita to go. “Any discussion of the moderating importance to the Chinese economy of commodities in general, and energy in particular, is therefore premature,” they say, “given what an outlier China would be if it were transitioning to a services-based economy at this low level of both energy consumption and steel capital stock.”
But this is just the industrial section. But what of the country’s banking sector, which many analysts believe to be overleveraged? In fact, the Bernstein comments echo something Rob Rennie, Sydney-based WestPac’s global head of market strategy, told BI as part of our 10 Things You Need To Know “5 Questions” series: That financial stress, too, has not about to cause a collapse. He gave us a chart showing his firm’s index of financial stress, which measures things like corporate bond spreads and volatility. “While the financial press has spent a great deal of time writing about China’s ‘Lehman moment’ we have been surprised by the limited move to price this in various asset markets in China,” he said.
The IMF recently slashed its growth forecast for China to 7% from 7.3%. But IMF deputy chief David Lipton said that while investors should watch out for a correction in China’s property sector, the longer-term prospects for the industry remain good, David Lipton.
Seems like we can rest a bit easier on this.