Notwithstanding the general mood of optimism apparent in risk assets these days, there is a growing school of considered opinion which believes that China is heading directly for a hard landing. Complicating the compilation of evidence to support this view is the fact that the Lunar New Year holidays were earlier than usual this year, distorting most series.
Even so, there are enough signs to build a convincing case in support of this hard-landing contention. Car sales in the first two months of 2012 fell 6.5% in year-on-year terms; crude steel production is now barely positive, down from a growth rate of 40% in late 2009; and the growth of exports has slowed markedly, especially to Europe. House prices have dipped sharply in many major cities and construction has decelerated as well. Last week, departing Premier Wen Jiabao announced that the growth target for this year had been lowered to 7.5%, down from a previous estimate of 8%. Corporate earnings have softened significantly. As well, the Chinese equity market is under-performing in relative terms – the Shanghai Composite has shed more than 20% over the past year and is still down more than 60% from the late-2007 peak. China’s incredible growth story has been financially crippling for equity investors.
Compounding the economic and financial uncertainty in China is the fact that this year marks a change in political leadership in the country. Outgoing Premier Wen Jiabao has been remarkably forthright in his views recently, claiming that his country faced a cultural revolution unless it embraced democratic principles. Thus far, international investors seem relatively sanguine that China will avoid a hard landing. Although policy officials still have numerous policy options at their disposal should the situation worsen further, nevertheless the drum-beat of warnings on the economy is getting louder. Even the exchange rate is taking notice – the
renminbi has actually depreciated against the dollar so far this year.The challenges over the next couple of years are immense, not just financial but also structural, social and environmental. China will make for compelling viewing.