Feature Stories | Oct 27 2011
– China is facing slower GDP growth through loss of export demand
– China is facing slower GDP growth through slowing internal investment
– Economists do not expect a hard landing
– China's bubbles are manageable
– China remains in a solid financial position
By Greg Peel
“A hard landing in China is viewed by investors,” according to surveys by Barclays capital, “as the third biggest downside risk to emerging markets assets in the coming three months, following a double-dip recession in the global economy and the debt crisis in Europe”.
One might question whether these three candidates really need to be ranked or whether there is indeed an element of mutual inclusivity about them: that is, Europe's debt crisis leads to recession in Europe, exacerbating weakness in the unemployment-bound US economy, and bringing China in for a hard landing via another collapse in export demand. However one views the situation nevertheless, the reality is that the twenty-first century global economic engine – China – is under threat from various sides.
Aside from a flow-on impact from Europe's woes, individually there are concerns over China's domestic economy: its recalcitrant inflation, its bubbling property market, and its overextended banks.
We sit this week with the world assuming, and indeed to some extent pricing in, a definitive European rescue package announcement in the next few days. We would not like to contemplate what might happen if European officials were to suddenly throw their hands up in the despair of disagreement once more, but at this point we'll take resolution as a given. We do, however, appreciate that a European rescue package merely heads off a complete collapse of the European and thus global financial system, just as Lehman threatened such in 2008. It does not prevent Europe from an inevitable period of either recession or very weak regional growth, particularly given the onus of bail-out fund contribution and coincident austerity measures.
We also recognise that while US economic data have shown some improvement in the last couple of months, and September quarter corporate earnings reports to date have been relatively sound, the US is not yet out of the double-dip woods. We cannot say that with conviction, although we do know that the Fed lies in wait with the big safety net of QE3 ready for deployment if needs be. With unemployment remaining stubbornly high in the US, whatever growth the world's largest economy can achieve in the medium term it will undoubtedly be modest at best.
And we know that China's September quarter GDP growth reading came in at 9.1% year on year, down from 9.5% in the June quarter. Such slowing always makes the world nervous, except for the fact we know Beijing has been deliberately orchestrating such a slowing via ever tighter monetary controls. But the balance here is crucial – as Beijing fights inflation, and attempts to contain a possible property market bubble-and-bust, the risk is that the landing China's economy comes in for is “hard” rather than “soft”, sending reverberations around the already struggling globe. Beijing's efforts to prevent an overheating domestic economy must also allow consideration for the importance of China's major export markets of Europe and the US, and the potential loss of demand therefrom.
Economists from houses across the globe have been spending a good deal of time recently researching China and, given Beijing's rather expedient data releases must always be taken with some measure of salt, crunching their own numbers to develop their own forecast models. The bottom-line goal of this research is to determine whether or not China is indeed in for a soft landing or a hard landing, and as such to determine just how hard might hard be, and how soft soft.
The following is a summary of what they've found.
China's GDP
Aside from marvelling at the ability of Beijing's statistics team to produce a GDP growth number two weeks after the end of said quarter when the developed world requires three months, we must also recognise that the September quarter GDP growth “result” of 9.1% is year on year and not quarter on quarter, hence GDP in the June quarter 2011 grew 9.5% over the GDP in the June quarter 2010, and likewise September was 9.1% over September. While this provides an impression of modestly slowing growth, true appreciation does require knowing how China's GDP looked individually in June and September last year.
Thus in order to get a handle on just how Chinese growth is faring from one quarter to the next in a step-along fashion, foreign economists like to take available data and attempt to calculate their own quarter-on-quarter results and also to allow for seasonal adjustment.
Danske Bank, for example, suggests that while 9.1% still looks healthy, growth appears to have “slowed substantially and been below trend for the past two quarters”. The trick is that Q2 and Q3 were quite slow for China last year before Q4 saw a pick-up in pace. It is thus misleading simply to look at Q2-Q2 and Q3-Q3 changes. Danske's calculations suggest GDP growth eased to 6.7% quarter on quarter and seasonally adjusted in Q3, from 7.1% in Q2.
Or you could take JP Morgan's similar calculation, which has Q3 and Q2 both at 7.9%, down from 9.0% in Q1. While we know economists have trouble agreeing today is Thursday, we have to concede they can only work with the data one can scrounge out of China and their own assumptions.
The good news is that Danske believes the Chinese economy stopped deteriorating late in Q3 and may have started to improve. Economists do agree that the September round of monthly data came in better than expected. Both the industrial production and retail sales growth numbers surprised to the upside, and fixed asset investment growth at least remained flat. JP Morgan points out further that electricity generation data from China is often considered a more accurate indicator than reported GDP, and it rose to 10.7% growth in September from 9.1% in August.
The Chinese auto industry continued its recovery in September, notes DBS Group, reaching its highest production level since March. Steel and steel products rose in the month, while cement production also picked up, pointing to continued construction investment.
Economists also agree that the PMI data of recent months, while weaker, has hardly been the stuff of hard landings. The services PMI reading has actually been accelerating while the manufacturing PMI has been hanging around the neutral point, and this week (which the economists featured herein were yet to know) has returned to mild expansion at 51.1 if HSBC's flash estimate is accurate.
One cannot ignore, however, that the export component of the manufacturing PMI has been weakening and has been stuck below the 50-neutral level now for the five months to September. This is hardly surprising given Europe is China's biggest export customer at 23% of total exports. As austerity measures and budget cuts bite in Europe – and that's pan-EU, not just in Greece – it stands to reason that demand for exports from China or anywhere else must be slowing. That end-demand will continue to fall, economists can only assume, impacting on China's Q4 and 2012 GDP growth.
As such, economists expect a further slowing from the Q3 result of 9.1% year-on-year. JP Morgan sees a 9.0% result for the full-year 2011, as does BA-Merrill Lynch, while RBS suggests “slightly over 9%”. National Australia Bank, on the other hand, is forecasting 9.25%. But then we turn to 2012.
Barclays Capital has pencilled in Chinese GDP growth of 8.4% for the full-year 2012. JP Morgan has 8.3%, RBS says “slightly over 8%”, and NAB suggests “around 8%” for 2012-13.
The point here is that economists expect Chinese growth to slow from roughly 9% to 8% next year. Had the recently released September quarter GDP result come in at 8% instead of 9.1%, global markets would have panicked. So if these are the forecasts ahead anyway, shouldn't we start panicking now? Well no, we shouldn't.
A drop from 9% to 8% represents a soft landing in economist eyes. And 8% also happens to be Beijing's long-held target growth rate, seen as the preferred balance between overheating and heading backwards. Barclays Capital makes an interesting point.
Economists used to think China needed a minimum of 8% GDP growth, representing ten million new jobs per year, in order to maintain social stability. In other words, while the developed world sees recessionary numbers as anything in the negative, China's equivalent, given its enormous population, is anything below 8%. But these calculations were based on 1990s data, Barclays notes, and the extent of demographic transition in the meantime implies that the number of new jobs required each year is smaller today. In fact, the Chinese labour force is expected to begin to decline from 2015. Hence Barclays argues that the minimum required pace of growth today is “much lower than 8%”.
In other words, we should not be fearing an effective Chinese recession in 2012.
What we should be expecting is a soft landing, but we haven't yet determined why economists generally expect China's landing to be soft rather than hard. Behind those expectations are a number of factors.
The Europe Effect
As noted, the EU is China's largest export market at a current 23% share. Exports to the EU reached 19.7% in 2010, notes DBS, up from 15.3% in 2000. Of the 19.7%, only 3.7% ended up with the PIIGS (Portugal, Ireland, Italy, Greece, Spain), up from 2.9%. This may suggest a lesser risk of falling demand from Europe than the full share might imply, but as DBS reminds us, default in one country can end up being contagious.
Such contagion was evident in 2009 when Chinese exports to the US fell in the wake of the US subprime crisis, but exports to the EU fell by even more – 19.3% in fact. We should also consider that currently 18.5% of US exports go to the EU, so the knock-on effect of falling European demand will be global. On that basis, we would be forgiven for being very afraid.
We must consider, however, that while China's total exports fell 16.0% in 2009, in 2011 year to date they have risen by 23.7%. Yet from early 2011, the focus of the world's worry has been on a Greek default setting off the European dominoes, providing us with “Lehman all over again”. Hardly the climate of global confidence in which one might expect Chinese total exports to rise 24%.
Moreover, the export contribution to China's GDP averaged 19.1% from 2005 to 2007, but in 2010 that figure was only 9.2%. Many assumed in 2008 that China would be immune from a US-based banking crisis but they were proved very wrong. China relied too heavily on exports and its domestic economy was not yet mature enough to stand on its own. Not only is China's domestic economy standing on its own in 2011, it's winning gold medals for hurdling. GDP growth reliance on exports is much diminished.
ANZ Bank economists calculate that China alone has accounted for nearly one third of global GDP growth since the GFC. They are forecasting the one third mark to be exceeded in 2011. ANZ also notes that most of the goods heading to the EU from China – that 23% – are non-discretionary items. On that basis a collapse of general EU demand may not weigh as heavily on China as might be immediately assumed.
The China-Europe relationship is not, however, a one-way street.
Developed markets are big investors in China, measured as foreign direct investment (FDI). As business conditions worsen in Europe, an inevitable response will be a repatriation of profits. China experienced a 20-40% decline in FDI in 2009, notes ANZ.
Yet today EU-based companies contribute only 5% to China's total FDI, ANZ points out, and given China holds more than US$3 trillion in foreign exchange reserves, capital outflows back to the EU represent an “almost negligible risk” to the Chinese economy.
Another risk is that of Chinese banks' exposure to the EU financial sector via assets held in China by EU-based banks. However ANZ calculates this total to be 108bn renminbi, or 1.3% of China's total banking assets. Yet ANZ notes that one must also consider the exposure of China's state-owned enterprises (SOE) via lending outside of China. EU bank lending to Hong Kong totalled around US$386bn in the March quarter this year, and lending to Singapore US$200bn. If China's SOEs are major beneficiaries of this lending, then the impact of large calls on loans on those SOEs “could be substantial,” warns ANZ.
Then we must, of course, consider China's direct exposure to EU sovereign debt.
DBS calculates China's holdings of euro-denominated debt to be around US$859bn, or about 27% of foreign reserves. Now that's scary. But actually it isn't all that scary given the disparity of risk among eurozone economies. A proportion of that US$859bn is invested in high-grade German bonds as opposed to high default risk sovereign paper. Moreover, given China's largely closed financial system, Chinese commercial banks have very limited exposure to eurozone sovereign debt.
Indeed rather than being a cause for concern, the European crisis could yet prove a bargain hunting opportunity for China, DBS suggests. It was reported last month that China was considering buying real assets in Italy, and already China has interests in Greece's shipping industry.
The economists at Barclays Capital don't really see the external impact from slowing demand in Europe and elsewhere as the significant issue for China at all. Barclays is forecasting 9.1% GDP growth for China in 2011, dropping to 8.4% in 2012. But that drop will be as a result of internal factors, not external factors, are far as Barclays' “base case” forecasts go.
That is not to say Barclays hasn't considered the ramifications of a global recession and a collapse in demand for Chinese exports. The biggest losers from such a loss of demand would be China's small to medium enterprises (SMEs).
A disruption in order flow could be the last straw for SMEs in many areas of China, Barclays believes, who are already battling with rising wages and funding costs. More than 80% of SMEs rely on borrowings but only 15% borrow from China's banks. China's large banks can be lenient on delinquent borrowers, perhaps by order of Beijing (more on that later), but non-bank lenders are unlikely to be so sympathetic.
The IMF has recently examined the potential effect on Asian economies from a global recession. Assuming negative 1% growth in the US and negative 3.5% growth in the EU – numbers Barclays does not see as unreasonable – the IMF calculates a four percentage point reduction in China's GDP growth. Applying the same assumptions leads Barclays to a similar result. Such a global recession would see Barclays' 2012 forecast Chinese GDP growth drop to 4.5% from 8.4%.
Now that is definitely scary. That would clearly be a number representing recession in China. We are reminded that despite no Chinese exposure to US subprime securities, China's GDP growth fell from 9.7% in the September quarter of 2008 to 6.6% in the March quarter of 2009.
Barclays is quick to point out, nevertheless, that such a forecast ignores whatever policy response Beijing may unleash (more on that shortly too). Although the policymakers do not have quite the open cheque book they did in 2009. And given Barclays' own global GDP forecasts are for 3.6% growth in 2011 followed by 3.7%, Barclays is simply not predicting 4.5% growth for China in 2012.
Is Barclays right, then, to consider the real risk of a Chinese hard landing to be internally driven, not externally driven? Well, that depends on those factors currently at play in China's domestic economy.
The Property Bubble
As noted, China's GDP growth collapsed to 6.6% from 9.7% within one month of the GFC. The collapse reflected a sudden plunge in export demand from the developed world and highlighted the extent to which China depended on its export industry. However that same industry had by then allowed China to build up enormous foreign currency reserves based on its trade surplus and the global trade imbalance. Beijing thus moved swiftly into action, deploying surplus funds for history's largest ever fiscal stimulus package.
The intention was to provide a solid boost to China's domestic economy which had been neglected while exports reigned supreme. In so doing China would affect indirect support for developed economies while moving to correct its own internal/external GDP imbalance. The results were spectacular and China's GDP was quickly back to double-digit growth.
In essence Beijing handed out funds to China's banks and told them to lend. Infrastructure projects and housing construction were a priority, to both connect and accommodate China's transiting masses. The “free money” played right into the hands of Chinese property developers who then set in train a building frenzy which could still not keep pace with China's newfound upper and middle class wealth and access to cheap mortgages. House prices soared and soon the world was talking “property bubble”.
The property bubble and accompanying stock market surge soon had Beijing tightening monetary policy to avoid an overheating economy. An eventual target of 8% GDP growth was once again set. Beijing also added fiscal dampening measures including restrictions on house purchases in major, rapidly growing cities.
As a result, house prices have begun to stabilise or even decline in a large number of cities across the country in recent months, Barclays notes. Beijing is now considering extending those purchase restrictions to second and third tier cities. However for the rest of the world looking in, a tipping over of house prices has sparked genuine concern that a major meltdown could follow, similar to those seen in Japan in 1989, Hong Kong in 1997 and the US in 2008.
The result would also threaten to bring down over-leveraged property developers, thus exacerbating the risk and again providing expectations of a hard landing for the Chinese economy.
If a property bust is thus a real threat, why would Beijing continue to apply policies which appear only to exacerbate that risk? The answer to this question provides a clue as to why economist across the globe do not believe any house price pullback in China must lead to a bust.
Beijing wants to rein in the property developers and, if you like, teach them a lesson. Behind the scenes of the “capitalist” pursuits of the developers Beijing has also been running a more “communist” policy in the compulsory construction of social housing. By implementing such a policy Beijing is attempting to head off an inevitable “have and have not” divide that so defines the developed world while at the same time preventing bank lending and construction being directed only toward ever more credit-risky developments for the rich.
The policy has also led to often cited YouTube vision of entire Chinese cities newly constructed and totally empty. Such images have heightened concern from outside observers. But economists suggest that Beijing's policy is a sensible one and the government is simply using its available funds to preempt the ongoing migration of Chinese workers from rural to urban centres. That migration is a long way from over, and when the country folk arrive in the big city they will have affordable housing already available to them.
The availability of affordable housing both avoids later social unrest and also provides support for China's construction and building material industries at a time when property developers are backing off. And Beijing is quite happy to see the developers face losses and bankruptcies in order to cool down the higher end of the property market. The balance of policies should, in economist views, prevent a full-scale property market meltdown.
That is not to say the risk is minimal. Recent stress testing by Standard & Poor's showed that most developers could absorb a 10% decline in house sales but a 30% decline could have serious ramifications. In the month of September, average sales in twenty key cities declined by 13%.
Such data has been enough to put the fear of God into some outside observers, but Citi notes China's nation-wide statistics indicate that sales rose on average 37% in September. “While the market's attention is caught up with negative news flow in top tier cities,” says Citi, “NBS statistics suggest low tier-2 and tier-3 markets still appear robust, and indeed exceed our expectations as well”.
Citi analysts believe these markets may also begin to soften over time but they do not believe we are currently seeing a broad-based market collapse.
Barclays economists rule out any comparisons with Hong Kong in '97 and the US in '08 given Chinese households are simply not highly leveraged, as was the case in Hong Kong and the US. Total mortgage loans represent 12% of all loans outstanding, and only 16% of GDP. The latter figure is less than total annual household savings.
China has already experienced two rounds of serious house price declines, Barclays notes, in Shanghai in 2004 and in Shenzhen in 2008, and in neither case was there widespread and systematic macroeconomic consequences.
The bottom line is that economists across the globe acknowledge the current risks inherent in China's property market and cannot rule out impending pain. But given China's particular situation they do not foresee any wide-scale property market meltdown.
The property bubble in China nevertheless forms part of a broader credit bubble, and as such there is a growing fear from outside observers that Chinese banks will be left with excessive levels of non-performing loans and that a credit crunch will ensue, once again suggesting a hard landing.
The Credit Bubble
Beijing's fiscal stimulus did not just find its way into property development and mortgages but into infrastructure construction, business loans (as noted in the earlier discussion of Chinese SMEs), wealth management products and other lending as well. Beijing's policy was arguably too successful too quickly, forcing the government to spend the last two years tightening monetary policy through interest rate increases and continuous increases to bank reserve requirement ratios, among other things. All of these policies were applied to stem the rampant flow of credit.
However while the stimulus response was rapid, the subsequent policy response has been much slower in order to prevent a sudden shock to the system which might affect a hard landing. In other words, a lot of the loans are already out there and far from being fully repaid. What's more, policy tightening from Beijing has coincided with the gradual embrace of developed world non-bank lending markets and off-balance sheet borrowing instruments. This so-called “grey” credit market has grown to spite Beijing's attempts to curb bank lending, and statistics are not readily quantifiable.
Clearly infrastructure investment was front and foremost an intention of Beijing's original stimulus. With regard to such investment, economists have argued that given most are of a commercial nature (railways, toll roads etc), once completed they are able to service their own debt. Barclays notes many of the originally planned projects are indeed now completed.
The result is that infrastructure investment has now slowed from the heady levels of 2009-10 to around 5-6% per annum currently. The initial surge has created significant short-term overcapacity in many infrastructure areas, and given the financial burdens these projects placed on both the government and the financial system, Barclays expects investment to remain slow or weaken further.
DBS agrees that the tight monetary environment could start to take its toll on investment growth, adding further headwinds alongside the weakening export market. A large number of rail projects have recently been halted, DBS notes, in part due to safety concerns but also due to funding shortages.
Such factors begin to add up to an inevitable rise in the level of bank loans unable to be serviced due to a slower economy, such becoming non-performing loans (NPL). NPLs were a distinct feature of the Japanese economy's hard landing in the early nineties which again provides a historical point of reference for outside observer fear.
DBS economists join many others in being concerned specifically about the magnitude of local government debt in China, despite assurances from authorities that debt levels are manageable. Beijing estimated earlier this year that total obligations stood at around 10.7 trillion renminbi with over 40% falling due by the end of 2012. That equates to about 43% of expected local government revenues. Local governments are also feeling the pinch from a slowing property market given revenues derived from property taxes.
Despite some steps being taken, DBS notes authorities are yet to clearly devise a strategy to manage these debts. A failure to do so could have large ramifications for China's banking sector which is set to feel the pinch from tighter capital rules over coming years. Banks are already attempting to raise significant amounts of capital to shore up their balance sheets.
The size of the grey market or shadow banking system is thought to be large, but as DBS points out the magnitude of risk is difficult to gauge. Beijing is nevertheless not oblivious to this issue, and as such is taking fiscal policy steps to head off building problems (more on policy shortly). It is also notable that Beijing recently injected amounts of capital into major banks to alleviate concerns in the overt banking market. That's one of the beauties of China's non-democratic system – such TARP-like policy can be enacted within a heart beat unlike that which we saw in the US in 2008 or that which has been a source of disagreement in Europe for the past two years.
It's also one of the reasons economists are not so concerned about the accumulation of NPLs. Beijing provides full support to the system, including to banks and large corporations. The major banks are state-owned, and the stimulus package that has led to potential over-lending was Beijing's policy directive. Any NPLs that accumulate are thus ultimately Beijing's responsibility.
At this stage, China's banks generally remain in “robust financial health,” Barclays suggests, with an average NPL ratio of 2.5%, a capital adequacy ratio of 10% and a reserve requirement ratio of 21.5%. These buffers provide the banks with “substantial” room to absorb any rise in NPLs in the coming years without seriously affecting their viability.
One wonders, however, how a weakening in export demand and building pressures in the financial system are weighing on that Great Hope of the global economy – the Chinese consumer.
Consumption and Inflation
When investment growth moderates, consumption growth is also likely to slow, notes Barclays. Chinese consumption may remain resilient given ongoing wage growth, but it is unrealistic to expect consumption to fill the gap of slowing investment and therefore support GDP growth at current rates. Around one-third of investment expenditure ends up as consumption spending in China, Barclays estimates.
DBS notes, nevertheless, that despite Beijing's tightening policy, easing asset prices and higher food prices, retail sales accelerated in September.
Consumption growth is therefore expected to remain robust, buoyed by a tight labour market, strong (just not quite so strong) economic growth, and increases in low income subsidies.
An inevitable consequence of robust consumption is nevertheless rising inflation, and runaway inflation has been the target of Beijing's policy responses in 2011 more so than runaway GDP growth. Chinese inflation-watching has thus become a regular edge-of-the-seat pastime for foreign observers worried about further tightening measures.
Inflation rose 6.1% in September, down from 6.2% in August, but well above Beijing's 4% target. Food inflation remained unchanged at a whopping 13.4% year-on-year.
JP Morgan expects CPI inflation to continue to ease in the December quarter given a natural delayed impact from earlier tightening measures and also due to the “base effect”. The base effect simply acknowledges that every time one measures growth, one thereafter moves the base to the new level before measuring the next round of growth. The higher that level becomes, the more growth is needed to provide the same result again in percentage terms. Thus if tightening measures are having a downward impact on inflation, the base effect will actually speed up a fall towards the 4% growth target.
JP Morgan expects the slide in China's CPI to be more notable in October and November such that the year-end number will read 4.5%. RBS has pencilled in 5% for 2011 and only 3% for 2012. It must be noted that recent falls in commodity prices will also serve to ease Chinese inflationary pressures.
If inflation ceases to be a problem, then Beijing can return to the business of setting policy in relation to domestic GDP growth and external forces (such as Europe).
Policy
With inflation beginning to ease, Beijing has been able to remain on the sidelines these past couple of months without announcing further tightening while China, too, watches the developments in Europe. Were the European situation to deteriorate further, Beijing can always return to easing monetary policy in order to head off contagion into China. If Europe can come up with a resolution, then falling inflation and easing economic growth may yet allow for some easing measures to help address some of the domestic pressures addressed above.
Economists mostly agree, however, that Beijing will simply remain on hold at least through the December quarter. There is no point in providing inflation with an excuse to run again simply because it has come back under control. Besides, easing policy only provides room for the noted bubbles to keep bubbling.
To that end, Beijing could find itself a bit between a rock and a hard place. But then monetary policy is not its only tool. Beijing might be able to ease off on bank reserve requirement ratios in order to draw SME's out of the grey market and back to the banking sector over which the authorities have more control, but there are already plans afoot to assist SME's through other fiscal subsidies. Similarly, Beijing is considering preferential tax policies for railway bond issuance to specifically address the stalled railway project problem noted above.
Throw in the aforementioned compulsory social housing policy, and we have a number of examples of how Beijing can specifically manipulate fiscal policy to target problem areas and head off calamities before they occur. We must remember that Beijing is carrying a rather large budget surplus, unlike Europe, the US or Japan.
Beijing cannot, however, suddenly implement another stimulus package to rival that of 2008 were the European situation to deteriorate and global financial disaster to threaten once more. Package One has already caused problems of bubbles and inflation. But as RBS notes, China is still in a pretty solid position.
Indeed RBS notes China is in a position of “triple surpluses”. It had a trade surplus at 1.4% of GDP, a fiscal surplus at 6.1% of GDP and foreign reserves at 48.8% of GDP as at the end of June. The loan to deposit ratio was only 66.7% as at end-August. Comparing 2008 to 2011 through “on the ground” anecdotal checks, RBS suggest that while it felt like the Chinese economy was falling off a cliff in 2008, today its seems China is in a very slow recovery.
So where does all of this lead us?
Conclusion
The Chinese economy is not without its risks – some more quantifiable than others. Areas like the property market and the credit market (particularly the non-bank market) require close observation.
China was not immune to external factors in 2008 and while its domestic economy is proportionately much larger in 2011 it would be foolish to suggest China would not again be hit by external factors in 2011 or 2012 were the global economy to head into recession.
At this stage economists are not forecasting a global recession, but they are forecasting ongoing slowing in Chinese GDP growth towards the 8% mark through Beijing's policies and weakening external demand. Such a slowing fits nicely into “soft landing” rather than “hard landing” definitions, but that is not to say some impact would not be felt by economies such as Australia's given a reliance on Chinese demand.
Despite not expecting a hard landing, economists agree that there remains a possibility if one or more of a number of factors get out of hand. Domestically China is in a good position to cope with such issues, and from an external standpoint China is financially well positioned to weather the storm. Beijing has plenty of policy options up its sleeve.
DBS makes the somewhat ironical observation that despite China's plans to become the leading global economic powerhouse, what has saved it time and time again is its still mostly closed banking system and capital account. Stringent controls on foreign portfolio investment have averted any balance sheet crisis in the past decade.
“A hard landing would pose a serious challenge for China,” Barclays suggests, “but we think it would probably not cause the meltdown that some market participants fear”.
“At least not in the near term”.
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