Goldman: Stop Freaking Out, China Will Have A Soft Landing

china chinese parade partyNo rain here

Photo: flickr: Cormac Heron

Goldman thinks everyone should just calm down about China. And actually, the reasons are very simple:

  • Inflation is easing
  • The government is showing signs of loosening monetary policy
  • There’s definitely room for more debt, in fact, the bears are over-blowing that whole situation.
  • And Chinese companies are still doing well

You see, according to them, monetary tightening on inflation fears was the reason they slowed down in the first place.

From the report:

Strengthening support for growth should be seen by late 1Q/early 2Q2012 as inflation should return to a comfortable zone then, in our view, and growth should weaken further, both domestically and globally, resulting in the need for more active policy intervention.

They think the bears don’t appreciate China’s possibilities for growth and reform, but we here at Business Insider noticed one weird little thing they said about the reform bit:

One important political event in 2012 is government succession, which should take place in October 2012…We believe leadership change provides more incentives for growth and stability near-term. For example, we note that historically FAI growth (for which the fiscal spending by local governments is usually one of the major drivers), tends to be high in the first two years during the term of government administration, and then stabilise at decent levels towards the end of the term…we acknowledge that it may potentially result in delays to less popular structural reforms.

In other words, the political transition will delay some tough decisions about how to grow the country as the new administration eases into rule and establishes its legitimacy. That means there’s no hard landing for now, but there’s no telling about the future.

Bottom line: The big drag on China has been fiscal tightening because of inflation fears.

Inflation is slowing, and that means the government will have room to lower interest rates and allow more lending.

So the pick-up in growth is going to hit in 2H12. They're thinking 8.7% in 3Q12, and 8.8% 4Q12. It's not 9%, but it's not shabby either.

So don't worry, be happy. These guys have it under control.

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