China Set for Soft Landing

Whether China is headed for a hard or a soft economic landing remains to be seen, but signs are pointing toward gentle, not tumultuous, repercussions as the government of the world’s second-largest economy remains committed to infrastructure investment and policy easing in case the economic picture turns grim.

Ratings agency Fitch said last week that it expects China to grow 7.8 percent in 2012 and 8.2 percent in 2013, followed by 7.5 percent in 2015 — levels that are not representative of a hard landing in the wake of the global economic slowdown that has stalled the world economy in 2012.

“In my view, a soft landing is where growth slows gradually to around 6 per cent or so,” Gerard Lyons, chief economist at Standard Chartered, wrote in an opinion piece in Gulf News. “A hard landing is where growth either falls abruptly or continues to slow towards zero, or not far above it.”

Lyons added, “[p]utting recent developments alongside the imbalanced nature of China’s economy, the implication is clear: do not be surprised if there are slowdowns like the one we are seeing now. But even if there were a set-back, it would not mean that China’s economic boom is over. Far from it. The trend in China’s economy is up, but one should expect set-backs along the way.”

Early last month, China’s National Development and Reform Commission approved 60 new projects, including the development of railways, roads, harbors and airports, The Telegraph reported. The projects come at a cost of $150 billion and are aimed at keeping growth alive. The newspaper added that this stimulus shows that the country’s ruling Communist Party is “sufficiently alarmed by [the] mini-slump of recent months to put its reform drive on hold, opting instead for prime pumping” to help it through its handover of power in October.

A hard landing in the longer term could happen, some economists say, if China does not embrace an agenda of economic reform. At a late September forum on China in Washington, sponsored by the Carnegie Endowment for International Peace, an IMF official said, “[i]n order to sustain this soft-landing in the next few quarters, in order to keep the economy an even growing at around 7 to 8 percent each year, a package of policies is needed to shift towards more consumption-based and inclusive growth.”

China’s economy grew 7.6 percent in the second quarter of 2012, “the slowest pace in three years, as Europe’s debt crisis limited exports and property curbs at home dampened domestic demand,” Bloomberg reported. Economists at UBS, ING Group and the Royal Bank of Scotland forecast 2012 growth of 7.5 percent, which would be the weakest since 1990.

But unlike the United States, which recently enacted a third round of quantitative easing (printing money to buy bonds) to get a handle on flagging economic growth and a lingering high jobless rate, China does not have an unemployment problem. China’s urban registered unemployment rate stood at 4.1 percent at the end of June, unchanged from the end of the first quarter and for all of 2011. As a result, the new government is unlikely to evoke any new stimulus measures, said Divya Reddy, a global commodities analyst at Eurasia Group, a New York-based risk consultancy firm.

“We think the government will continue to defend the 7.5 percent growth target for this year through incremental monetary easing as well as some fiscal outlays, but overall we don’t see any meaningful stimulus for the remainder of this year,” Reddy said last week at a Vancouver presentation that was co-sponsored by Eurasia Group and PricewaterhouseCoopers.

In a poll of seven economists based in Asia, China Daily reported that only three saw the risk of a hard landing in the longer term. Three predicted a soft landing, while one said using terminology like hard or soft landing is unhelpful as China is going to have to accept that its days of growing at 9 percent or 10 percent are over.

Zhu Min, deputy managing director of the IMF, said last month that the current slowdown in the Chinese economy may not be a bad thing considering it was overheated just 12 to 18 months ago.

Zhu said China has plenty of room to act both in monetary and fiscal terms to boost growth, something it may have to do to help the export sector weather poor demand in Europe and the US.

“China still has a lot of policy space,” Zhu told CNBC on the sidelines of the World Economic Forum meeting in the Chinese port city of Tianjin in September. “As the premier mentioned … China still has a budget surplus and also a 100 billion yuan fund they can use. The government deficit is roughly less than 3 percent (of GDP) and total debt is roughly 28 percent (of GDP), so a there is lot of fiscal room … Also if you’re looking at interest rates, there is a lot of monetary room as well.”

China has cut its interest rates twice this year, in June and July. It also eased monetary policy by lowering banks’ reserve requirement ratios three times since November of last year.

Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.