China's deflating bubble could cause a hard landing


LAST WEEK Chinese people celebrated the Mid-Autumn or Moon Festival by eating traditional moon cakes. This week is a public holiday to mark the anniversary of the revolution in 1949 that swept the Communist Party to power.

But as people chomped their rich moon cake pastries, which are traditionally filled with bean paste and egg, they were probably more uncertain than they have been for many years past, as economic growth stutters and the outlook for the world’s second largest economy looks grim.

There is uncertainty too, ahead of the leadership transition next month.

Last week, the Shanghai Composite Index fell below the psychologically crucial 2,000-point level, making the Shanghai market the worst-performing in the world. For reference, the Shanghai index was at about 6,000 points five years ago.

At a dinner in Beijing recently, an industry specialist and long-term China resident was very bearish on the prospects for the Chinese economy.

“All this new credit, but no exports, and no sign that domestic demand is growing enough to help. And the currency is still too strong. And there’s hidden inflation. Though I hate to say this, it looks like [American economist] Nouriel Roubini called it right again,” he said.

So, will Doctor Doom make the correct call again?

To recap on Roubini’s view of China: “In China, a hard economic landing looks increasingly likely as the investment bubble deflates and net exports shrink. Meanwhile, the reforms necessary to reduce savings and increase private consumption are being delayed,” he wrote in Slate recently.

Roubini said the worst would be avoided this year by introducing various forms of stimulus.

“But a hard landing becomes more likely in 2013, as the stimulus fades, nonperforming loans rise, the investment bust accelerates, and the problem of rolling over the debts of provincial governments and their special investment vehicles can no longer be papered over,” he wrote.

“And, given a new leadership’s caution as it establishes its power, reforms will occur at a snail’s pace, making social and political unrest more likely.”

Ratings agency Fitch seemed at least partially to bear out Roubini’s view when on Friday it lowered its 2012 growth target for China from 8 per cent to 7.8 per cent.

However, Fitch said it did not expect a hard landing as authorities have the scope to use fiscal and monetary policies to ward off a harsh downturn.

“This week is not a good week,” said one logistics industry executive. “A lot of businesses stocked up for the break in the last few weeks and thus – apart from the moon cake deliverers – there were much fewer trucks on the road.”

While acknowledging that slowing exports were dampening China’s growth, it said the cooling was part of broader government efforts to keep inflation at bay.

Logistics companies are benefiting from companies clearing out inventory, as people focus on getting product “just in time” rather than leave it to sit in containers on the ocean.

Also, while there are fewer people shopping on the high street, business-to-consumer (B2C) business is growing fast, he said. “There’s no need to go to the shop or, if you do, try it on and then get it at 50 per cent discount online. The wild card is the EU – if they can get the easing in quick, then we will see more growth. If not, I see 7.5 per cent being the new ‘normal’ as well . . . ”

Wang Tao at UBS expects September economic data and third-quarter gross domestic product figures, due to be released in mid-October, to show that demand remains weak, destocking continued and recovery has yet to happen.

“We forecast that industrial production growth slowed to about 8.6 per cent year on year in September, while Q3 GDP growth slowed to 7.3 per cent year on year. On the positive side, we expect to see a faster pace of credit and social financing expansion, a continued rebound in property sales, and an acceleration of infrastructure investment.”

UBS is forecasting that bank lending will have grown by 16.3 per cent year on year by the end September, with net new lending reaching 650 billion yuan (€80 billion), while the share of medium and long-term loans increases.

UBS expects inflation to moderate to 1.8 per cent year on year, and the producer price index to have declined another 3.4 per cent.