I honestly do not know what is keeping China's house-of-cards economy going. I suppose if the economic data (on inflation, GDP growth) were any good, we could be a little more precise about where they stand. But that data is, if not completely fabricated, not very trustworthy, so we have to read vague signs from afar. Certainly it looks like their property bubble is on the downside, so we might conclude that it's only a matter of time before faking prosperity is not sufficient to cover up the gaping holes in China's growth model. We should also bear in mind that it took two years for the U.S. economy to blow up after house prices peaked in mid-2006.
Soft landing? Or hard landing? This is how the China question is now being framed, and no doubt we have noticed that both phrases have the word "landing" in common. Writing at MarketWatch, Satyajit Das says the Chinese banquet is nearing the end.
SYDNEY (MarketWatch) — Like the rest of the world, China’s recovery from the global financial crisis was the result of “Botox economics.” Taking advantage of a centrally controlled, command economy, Beijing boosted output through government spending and directed bank lending to maintain growth...
China also has far greater levels of debt than commonly acknowledged, although the bulk is held domestically. The Central government has a low level of debt — around $1 trillion (17% of GDP). In addition, state-owned and state-supported entities have debt totalling $2.6 trillion (42%); local governments about $1.2 trillion (19%); policy banks $800 billion (13%); Ministry of Railways $280 billion (5%), and government-backed asset-management companies set up to hold non-performing bank loans $300 billion (5%). The total debt, around $3.6 trillion, is 59% of GDP...
The reality is that since 2007/2008, a part of China’s growth has been an illusion. Since 2008, China’s headline growth of 8%-10% has been driven by new lending averaging around 30%-40% of GDP. Up to 20%-25% of these loans may prove to be non-performing, amounting to losses of 6%-10% of GDP. If these losses are deducted, Chinese growth is much lower.
The case for a soft landing assumes that the investment and property bubbles are less serious than thought. Beijing has sufficient financial capacity to boost growth by loosening monetary policy and bank lending, while adjusting specific policies, such as lifting restrictions on housing sales to prop up prices.
In that case, China is able to boost domestic consumption, replacing investment as the key driver of its economy. Excess capacity is gradually absorbed as the world economy recovers. Growth comes down gradually, without causing social and political disruptions.
In contrast, the case for a hard landing assumes the rapid and destructive unwinding of asset-price bubbles and problems within the Chinese banking system. A poor external environment and losses on foreign investment exacerbates the problem. Growth collapses, triggering massive social unrest and political tensions.
The end of a cycle of debt- and investment-driven growth is typically disruptive. Japan’s experience, which China has drawn on in shaping its economic model, is salutary. Japan grew on average by 10% in the 1960s, 5% in the 1970s, 4% in the 1980s, and has remained stagnant since, as it adjusts to the deflation of its debt-fueled bubble.
As an old Chinese proverb, probably apocryphal, holds: “There is no feast that does not come to an end.”
JP Morgan's Adrian Mowat believes the jury is in. The verdict? A hard landing.
China's economy is already in a so- called “hard landing,” according to Adrian Mowat, JPMorgan Chase & Co.’s chief Asian and emerging-market strategist.
“If you look at the Chinese data, you should stop debating about a hard landing,” Mowat, who is based in Hong Kong, said at a conference in Singapore yesterday. “China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact.” His team was a runner-up for best Asian equity strategists in a 2011 Institutional Investor magazine poll.
What about China's trade balance? The ever-optimistic Keynesians writing for The Economist discuss China's current accounts in Fears of a hard landing.
China’s industrial production grew by 11.4% in January and February, compared with the same two months in 2010, much slower than its normal pace of about 15%. But the prospects for global growth are brightening, suggesting that China’s exports have bottomed out. And the slowdown in China’s economy has been matched by a helpful fall in inflation. That gives China’s government some scope to stimulate demand.
What about rebalancing? February’s trade deficit may be an anomaly but it highlights a broader trend: the swift decline in China’s external imbalance. China’s current-account surplus, a broad measure of the country’s external payments and receipts for goods and services, fell to 2.8% of GDP last year from a peak of over 10% of GDP before the financial crisis (see chart left). In Hong Kong’s currency-derivatives market people no longer bet that the yuan will only strengthen. That suggests the yuan is close to its “equilibrium” level, said Wen Jiabao, China’s prime minister.
Unfortunately, China has rebalanced externally without rebalancing internally. Its current-account surplus has narrowed largely because of an increase in domestic investment, not consumption...
Yes, it is unfortunate that China poured money into cities nobody lives in and malls nobody shops in instead of doing things the right way by bolstering domestic consumption. They took short cuts, and now they're going to pay the piper. No doubt those short cuts resulted from political considerations alone, not some genuine concern for the welfare of the Chinese people. And if you believe China's inflation numbers, and if you believe that China's industrial production grew by "only" 11.4% in January and February, I've got a bridge in Brooklyn you might be interested in buying.
So while various economists debate the "soft" versus "hard" landing question — a soft-landing in 2012, but with strong headwinds, OR a “bumpy” landing with a certain amount of pain, OR a one in three chance of a hard landing, OR China has the policy flexibility to engineer a soft landing, OR a soft landing, but a hard landing is an ever-present risk, and so on — I am waiting for the other shoe to drop. That could happen this year, it could happen next year. We are waiting for the situation to become so obviously bad that no amount of economic propaganda can cover it up.
China's current economic miracle? Please! I know something phony when I see it, and I'm looking at something phony right now.
Bonus Video — China's Hidden Debt