by Stephen Roach, former Chairman, Morgan Stanley Asia, via Project Syndicate
NEW HAVEN ā Concern is growing that Chinaās economy could be headed for a hard landing. The Chinese stock market has fallen 20% over the past year, to levels last seen in 2009. Continued softness in recent data ā from purchasing managersā sentiment and industrial output to retail sales and exports ā has heightened the anxiety. Long the global economyās most powerful engine, China, many now fear, is running out of fuel. These worries are overblown. Yes, Chinaās economy has slowed. But the slowdown has been contained, and will likely remain so for the foreseeable future. The case for a soft landing remains solid.
The characteristics of a Chinese hard landing are well known from the Great Recession of 2008-2009. Chinaās annual GDP growth decelerated sharply from its 14.8% peak in the second quarter of 2007 to 6.6% in the first quarter of 2009. Hit by a monstrous external demand shock that sent world trade tumbling by a record 10.5% in 2009, Chinaās export-led growth quickly went from boom to bust. The rest of an unbalanced Chinese economy followed ā especially the labor market, which shed more than 20 million jobs in Guangdong Province alone. This time, the descent has been far milder. From a peak of 11.9% in the first quarter of 2010, Chinaās annual GDP growth slowed to 7.6% in the second quarter of 2012 ā only about half the outsize 8.2-percentage-point deceleration experienced during the Great Recession.
Barring a disorderly breakup of the eurozone, which seems unlikely, the International Monetary Fundās baseline forecast of 4% annual growth in world trade for 2012 seems reasonable. That would be subpar relative to the 6.4% growth trend from 1994 to 2011, but nowhere near the collapse recorded during 2008-2009. With the Chinese economy far less threatened by export-led weakening than it was three and a half years ago, a hard landing is unlikely. To be sure, the economy faces other headwinds, especially from the policy-induced cooling of an overheated housing market. But construction of so-called social housing for lower-income families, reinforced by recent investment announcements in key metropolitan areas such as Tianjin, Chongqing, and Changsha, as well as in Guizhou and Guangdong Provinces, should more than offset the decline. Moreover, unlike the bank-funded initiatives of 3-4 years ago, which led to a worrisome overhang of local-government debt, the central government seems likely to play a much greater role in financing the current round of projects.
Copyright Ā© Project Syndicate
