Growing Fears of a Hard Landing in China

Nov 15, 2007

Growing fears of a hard landing in China
Any sudden downturn in economy will have major impact on East Asian markets

ENJOYING GROWTH: Increased consumer spending by the Chinese will not put the same pressure on prices as capital investments and exports, says Prof Sung.

NEW YORK - AS WORRIES mount about a downturn in the United States, there are increasing signs of trouble in China, too.

Despite the Chinese government's efforts to dampen growth, the breakneck expansion has continued. Because of China's importance to global commerce, the repercussions could be enormous - though not, perhaps, all bad.

The official inflation rate in China has risen to 6.5 per cent, and some economists think the real figure is much higher. How bad is the inflation problem? Part of what makes it a problem is that no one really knows.

'I don't think it's measured correctly, because the government has imposed price controls here and there,' said Professor Sung Yun Wing, chairman of the Chinese University of Hong Kong's economics department.

The vastness of the economy and the prevalence of black markets add to the difficulties. But Prof Sung explained that China's exporting success was bound to have increased its money supply, so more cash is chasing the scarce resources in the economy and driving up prices.
The problem may already have gotten out of hand.

TAKING A HIT

Even Japan, Dr Behravesh says, is very dependent on China as an export market. But many emerging economies in Latin America and Africa would also be hurt because they sell a lot of commodities to China.

Retail sales growth at 8-year high

CHINA'S retail sales rose at their fastest pace in at least eight years, buoyed by rising incomes and prices in the world's fastest-growing major economy.The 18.1 per cent increase last month from a year earlier to 826.3 billion yuan (S$161 billion) topped the 17 per cent growth in September. It was the biggest gain since 1999, when the government started releasing the data.

... more: 'The policy instruments are still pretty blunt in China in comparison to the US,' said Dr Nariman Behravesh, chief global economist of Global Insight, an economic forecasting company.

'So, there's a big risk of a policy mistake, which could trigger some kind of hard landing.' Using a big jump in interest rates could 'overdo it'.

If that happens, and China has its own downturn, the first effects will very likely be felt in its backyard.

China might well surpass Germany next year as the world's third-largest economy and its second-ranked trading country, but already, Prof Sung said, 'it's the No.1 market for East Asian economies'.

Even Japan, Dr Behravesh said, is very dependent on China as an export market. But many emerging economies in Latin America and Africa would also be hurt, he said, because they sell masses of commodities to China.

The economic effects might not be so negative elsewhere, though. 'It wouldn't be so bad for the industrialised economies, in that lower commodity prices, in particular oil prices, would actually help,' Dr Behravesh said.

The pressure applied to commodity markets by growing Chinese demand has been one of the main forces driving up prices. In addition, he pointed out, 'the US doesn't export that much to China'.

That rosy picture could darken, however, depending on the timing of a Chinese downturn. If it came at the same time as a severe slowdown in the US, the global economy would lose the strength of two very important engines, perhaps resulting in what Dr Behravesh called a 'rolling global recession'.

But he gave a small probability to that outcome, perhaps only 15 or 20 per cent. The Chinese government, he said, was unlikely to tweak the economy until after the Beijing Olympics next summer, by which time the worst might be over for the US.

Prof Sung said China still had one chance to try to head off a crisis - by allowing its currency to rise more quickly. Doing so would make Chinese exports more expensive to foreigners and imports more attractive to Chinese consumers - two checks on Chinese industry.

But even if China did dodge the bullet, he said, its problems might not be over. He asserted that China's deeper problem was the composition of its growth. If it continued to grow through businesses' investments in physical capital and through its exports, pressure on international markets and inflation could easily return. Increased spending by consumers, on the other hand, would not cause the same stresses.

In other words, it may not be enough for China to grow; it will have to learn to enjoy its growth as well.

Source: INTERNATIONAL HERALD TRIBUNE