Courtesy of John Nyaradi.
Will China Have A Hard Landing?
A critical question to how the world economy will progress over the coming months and years is, “Will China have a hard landing?” This question is sparking debate amongst many of the major global investment managers and brokerages throughout the world.
There was a recent survey conducted involving 19 of the major global investment managers and brokerages throughout the world. Not only did the survey results show disagreement over whether China (NYSEARCA:FXI) would have a hard landing, the survey results also showed that the managers and brokerages disagreed over exactly what a “hard landing” was.
Out of the 19 participants in this survey, 5 defined a hard landing as China’s (NYSEARCA:FXI) growth in gross domestic product (GDP) falling below 7%, 1 defined it as growth in GDP falling below 6%, and 5 defined it as growth in GDP falling below 5%.
Other respondents in the survey believed that a hard landing didn’t involve the actual rate of growth, but rather, how fast that rate of growth slowed during the course of 2012. Mingchun Sun, Daiwa Securities’ head of China research and regional chief economist, stated that a 2% reduction in GDP growth during 2012 would constitute a hard landing. Conversely, Joy Yang, chief economist for Greater China at Mirae Asset Securities, stated that a 1.5% reduction in GDP growth during 2012 would constitute a hard landing.
However, some respondents believed that a hard landing wasn’t that easy to define and quantify due to the factor that qualitative measures would also play in determining whether the landing was hard or soft.
Shuang Ding, senior China economist at Citigroup, defines a hard landing as growth being below 7% for two consecutive quarters, but this wouldn’t apply if that less than 7% growth occurred because of the government’s deliberate attempts to slow the economy. Pacific Investment Management Company’s (PIMCO’s) Scott Mather stated that even less than 5% growth in China’s economy would have to be combined with “significant stress” in the financial markets in order to make this landing a hard landing.
The aforementioned survey showed that 9 of the 19 (47.4%) participants think that a hard landing in China is unlikely to occur at any point within the next three years, while 8 of the 19 (42.1%) think that there is a credible threat of an economic catastrophe occurring in China. However, 14 of the 19 (73.7%) China market experts believe that the current level of fear regarding China’s economic growth slowdown and an imminent hard landing are unwarranted as compared to just 3 of the 19 (15.8%) believing that the fears were justified.
Regardless of whether experts think that the fears over China’s economic growth slowdown and a potential for a hard landing are justified or not, most survey respondents believe that Beijing will take the necessary steps needed to ensure that China’s economy will endure smooth sailing, even with a likely change occurring in China’s leadership in 2012 at the Communist Party level and in 2013 at the government level.
China’s growing importance on the world stage as the world’s second-largest economy is what is causing many investors to be concerned over Premier Wen Jiabao’s lower economic growth revisement from 8% to 7.5% for 2012. Additionally, the fact that miner BHP Billiton Ltd. (AU: BHP), a huge supplier of iron ore and other minerals to China, stated that it was reevaluating its capital-expenditure plans due to the caution over Chinese demand, is also causing investors to fear an economic downturn in China. Combine that with a growing sense that Beijing would likely continue with a strict monetary policy and various market curbs, especially in the property sector, and most investors’ eyes are keeping a close watch on China’s economic growth numbers during 2012.
It is likely that investors were not reassured about China’s near-term economic outlook when China’s 2 Purchasing Managers’ Index (PMI) numbers gave two different forecasts. China’s official PMI increased from 51 in February to 53.1 for March, indicating a further expansion in the manufacturing sector (any number over 50 indicates expansion). This was the fourth straight month that this PMI reading increased.
However, banking group HSBC and London financial-services consultants Markit lowered the PMI from 49.6 in February to 48.3 in March, indicating further contraction in the manufacturing sector (any number under 50 indicates contraction). This was the fifth straight month that this PMI reading decreased.
How can two PMIs from the same country lead to two very different conclusions about that country’s near-term economic outlook? There are a few different reasons given for this apparent contradiction.
One reason is that HSBC’s PMI only surveys a small number of companies, and these companies are usually smaller and more privately-owned than the companies that are measured in China’s official PMI (NYSEARCA:CHIQ). In addition, the companies measured in HSBC’s PMI are largely export-oriented, and China’s export numbers had declined 0.5% year-to-year from January 2011 to January 2012. Conversely, China’s official PMI could be upwardly distorted due to imperfect seasonal adjustment. In addition, China’s official PMI surveys China’s larger, more public companies, hence adding another reason why China’s two PMI figures are forecasting such different near-term economic outlooks.
Daiwa Capital Market analysts, however, came up with an explanation that would take into account both of China’s PMIs, yet still lead to one conclusion – that China’s economic growth was slowing as compared to this same time last year. Daiwa believes that China’s government must loosen its economic policies in order to reinforce economic recovery in China. Other China experts also agree with this, believing Beijing can now relieve policy-tightening moves without worrying about an increase in inflation.
Angus To, senior research analyst at ICBC International, investment-banking unit at China’s largest bank (NYSEARCA:CHIX), believes that if China’s government takes timely actions towards relieving its tight economic policies, China can avoid an economic hard-landing. This is why many experts believe that China’s government will start shifting its focus from controlling inflation to boosting economic growth. Many experts also believe that as China’s economy moves from an export-focused to a consumption-led economy, its GDP will be more immune to a reduction in exports.
However, the reduction in exports due to credit crises occurring in highly-leveraged countries could still hurt China’s economy long term due to the fact that China is the world’s largest exporter. The greatest threat to China’s economy will likely come from the possibility of credit crises occurring in highly-leveraged countries, as this will lessen the demand for Chinese-made goods in those countries.
Most experts agreed that there were two main scenarios where a hard landing for China’s economy could occur:
- Political disruption that prevented the central government’s ability to redirect growth toward the demand for domestic goods. China is about to experience a generational leadership change in 2012 and 2013, which could signal a change in policy priorities.
- China’s property sector is experiencing falling prices due to the government’s desire to keep housing prices down and affordable to the masses. Due to the fact that residential construction makes up a large percentage of GDP, a sharp correction could severely hamper GDP growth.
Bottom Line: There is disagreement over whether China’s economy is contracting or expanding due to 2 different PMI numbers and near-term economic outlooks; most experts agree that China’s central government has the authority and ability to keep its economy from experiencing a hard landing if it takes the necessary measures to easing its tight economic policies, which most experts believe it will based on its previous handling of China’s economy.
Survey Data courtesy of MarketWatch.com
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