What a hard landing in China means

Many commentators of late are proclaiming that China has avoided a “hard landing” and will be rebounding to 8% growth any day soon. A more sober assessment warns realists to not jump to robust growth scenarios quite so fast.

China is the world’s second largest economy behind the US, and weakness there has huge knock off effects around the world. While its government has a history of unsustainable capital spending (60% of GDP) to keep workers busy over the past 10 years, the funding for that spending has come from export income. A tiny 37.7% of Chinese GDP is driven by domestic consumer spending, as still weak safety nets prompt Chinese citizens to save about 30% of their income.

Chinese exports soared on western demand from the time it joined the World Trade Organization in late 2001 to the credit bubble peak in 2008. But that export demand was based on a western credit bubble, that was based on a global housing bubble, that lead to a commodities bubble, all of which came to a spectacular bust in 2006-2008. Notwithstanding whacky amounts of global bank liquidity, Chinese export growth continues to be weak now that western consumers are living out a frugal chapter.

Since 2008, China has been increasing government debt and burning through excess capital reserves to try and keep their growth going. This morning inflation data out of China shows soaring food prices and weak domestic loan demand that will curtail the government’s ability to pump liquidity further. Growth of even 5 t0 6% would be considered a “hard landing” for an over-levered China. Meanwhile warehouses there are bulging with record stock piles of pretty much every commodity.

The end of the commodity bubble is negative for commodity prices, and commodity dependent countries and currencies, but eventually lower prices will help to bring down the cost of goods and services which will improve affordability for under-employed, over-indebted global consumers.

In this clip Societe Generale’s Stephen Gallagher explains the ramifications of a sharp slow down in China this year and looks at which sectors would be hit harder than others.

Here is a direct link.