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CCTV News, et al: Hard Landing or Soft?

July 19, 2011

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 FTChinese.com.  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 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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2 Comments leave one →
  1. michelle permalink
    July 20, 2011 3:54 pm

    People already know that China needs a correction and faces a downturn, that will badly impact on other countries in some ways. That’d be the answer without surprise. What people do not clearly know is how the problems started, what is going on, when and how the correction and downturn will happen and develop in the short or long run, and why. Researchers should more endeavor to analyzing the profound history of an issue, other than giving cliche answers or meaningless predictions in media.

  2. August 1, 2011 9:57 pm

    Dear Professor,

    I just saw you on CCTV and then read your blog. I think you and I are on the same page when it comes to the likely path of the Chinese economy. Here is what I wrote to my client this past weekend.

    Regards,

    LL

    When it comes to safety issues in China, the golden rule of “there is never just one cockroach” definitely applies.
    Here is something you may not be aware of. In a 9-day span (starting July 11th), there were 5 bridges collapsed or cracked in China.
    • On July 11th, a bridge built in 1997 (14-year life span) collapsed in Jiangsu
    • On July 12th, a bridge that has not even been put in service cracked in Wuhan
    • On July 14th, a bridge collapsed after just 12-year in service in Wuyishan
    • On July 15th, a major bridge collapsed after 14-year service in Zhejiang province. The bridge had undergone a major repair 5-year ago.
    • On July 19th, a bridge collapsed near Beijing. The cause was attributed to an overloaded truck which is very common in China.

    While the concerns about quality and safety of bridges have unfortunately come true, there are also rising concerns about the quality of the 10M units of social housing that are under construction. For example, in Zhengzhou, a tier 3 city in Henan province, 8 buildings of social housing had to be demolished even prior to the final inspection. Why? Because the bricks used by the builder started to crumble on its own. Further, some developers/project administers, in order to save money, instead of using 9mm diameter rebar (the minimum thickness in the construction code) used only 7mm diameter rebar.

    Rinse and repeat may be a necessity to become a Kong fu master but how could a country accumulate wealth if the infrastructure is built, then torn down and then built again? Are bridges or buildings built for fun, for practice or just for the GDP? However, from a coal or iron ore investor’s perspective, the reconstruction due to man-made reasons does add incremental demand.

    Looking out to 2013 (after the transition into the next administration), I believe that there is a growing risk that China may have to slow down materially from the current growth rate as the new administration deals with the aftermath of 2009-2010 all out stimulus. There is a growing outcry from the people that the country needs to slow things down, taking a breather from the break neck speed and paying more attention to safety, quality and the environment. If the new leadership does listen, resource intensive fixed asset investments have the possibility of growing at a much slower rate or not growing at all.

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