The Case For A Hard Landing In China

Last Friday night, I was on CCTV News Dialogue discussing China’s 1st Half economic figures, and whether they mean China will see a “soft” or “hard” landing as it tries to rein in inflation and asset bubbles.  My fellow guest was Dr. Zhang Lifen, an associate editor at the Financial Times and editor-in-chief of  We agreed on most things — no fireworks here! — but still covered a lot of worthwhile ground.  You can watch the show here.

For a brief synopsis of my views, here is what I told the BBC:

“You have to look at what’s driving growth in China, it’s mainly investments,” said Patrick Chovanec, an associate professor at Tsinghua University in Beijing.

“This investment is being financed by expanding the money supply, which is fuelling inflation,” he added.

Analysts also said that given the huge amount of loans that had been extended by the Chinese banks, there were concerns about asset bubbles being formed in the country.

“A lot of the investment that is going out, there is a real question being raised about whether it is going to generate return and a lot of it has started to show up as bad debt in the banking system,” Prof Chovanec said.

He warned that the current path of growth in China was unsustainable.

“What we are seeing is not necessarily a strong economy, it’s an economy that has been pumped up on steroids,” he said.

However, Prof Chovanec said that despite the government efforts to rein in growth, a lot of people in China wanted the credit-led growth to continue.

“There is a tug-of-war between those who say keep lending and let growth continue, versus those who are more concerned about inflation and want to rein it in,” he said.

You can also check out some similar comments I made to German TV (in English) here.

And while the spokesperson for China’s statistics office this week downplayed the danger for a so-called hard landing of the country’s economy saying the risk for a severe slowdown was small, Patrick Chovanec is not so sure.

“What China has is growth on steroids,” he says. “It looks like growth and it looks like a strong economy, but resources and energy are not being channeled to the most productive parts of the economy.”

Chovanec believes that the central government can indeed soften and manage the economic downturn that he believes is inevitable, he is simply not convinced that they they will because of the political and economic risks involved.

“They can kick the can down the road,” he says and push back the inevitable, but ultimately that will only make things harder in the long run.

“China will have a correction, China needs a correction,” predicts Chovanec.

Speaking of corrections, Businessweek ran a thought-piece last week that tried to work through what the implications of a crash or slowdown in China would mean for the rest of the global economy.   I’m quoted briefly, and some of the scenarios that are discussed reflect the thoughts I shared with the author.  The conclusion:  a Chinese downturn would have a serious effect on countries like Australia, Canada, Chile, Brazil, and Germany that have been supplying China’s investment boom with raw materials and machinery.  It would also impact Western companies that have been seeing some of their best growth in the Chinese market.  But it would have only an indirect impact on most Western economies (like the US and most of Europe) that mainly buy things from China.  Of course, the purely psychological impact on global markets, for which China has been a bright spot in an otherwise gloomy world, should not be ignored.

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