New warning of dreaded 'hard landing' in China

An adviser to the Chinese government has warned that the world’s second largest economy could still fall to a ‘hard landing’ this year, in a worrying signal that contrasts with growing optimism among other economists that such a damaging scenario will be averted. 

According to Reuters, Shi Xiaomin, an adviser to the government, said: ‘A hard landing of the economy is possible this year as slackening domestic and external demand pushes (full-year) GDP growth below 8%, probably even to 6-7%.’

A hard landing is loosely defined as a decline in GDP growth to below 7%. Last year, China’s economy still managed to grow 9.2%, with growth slowing more in the second half of the year, but by less than most analysts expected.

‘More worrying is that such a slowdown is going hand in hand with a sharp decline in the overall economic efficiency,’ added Shi, who is vice-president of China Society of Economic Reform (CSER), a Beijing-based think-tank.

His comments will not be welcome in Beijing, where the message has been that growth will slow in a controlled way ahead of a leadership transition later this year. A hard landing would show that the Chinese authorities have not managed to gradually slow growth, and would have a huge impact on the global economy.

In contrast, Chinese vice-president Xi Jinping – considered to be the ruling communist party’s leader-in-waiting – reportedly reassured an audience of US business leaders on Friday that the economy would experience stable growth and avoid a hard landing this year. ‘2012 will be a crucial year in driving the 12th five-year plan. China's economy will maintain stable growth ... there will be no so-called hard landing.’

Speaking in Los Angeles, he added, ‘we will encourage more consumption, imports, and outward investment’.

His sentiment was reiterated by another Chinese economist yesterday, according to newspaper China Daily, a communist party mouthpiece. ‘Worries exist about a Chinese hard landing, but three risks facing China weakened significantly compared with the 2008 global financial crisis,’ Zuo Xiaolei, special advisor to the president of China Galaxy Securities said.

He cited unstable external conditions, challenges for small and medium-sized firms, still-high consumer price inflation, fears over a real estate bubble and funding of municipal governments as major risks, but according to the newspaper he noted that all of these risks had decreased.

The Chinese government, which is attempting to engineer a move from an investment and export-led economy to one that is fuelled by consumer spending, reckons that GDP will slow to 8.5% this year. ‘We should no longer be obsessed with the speed of growth,’ said Lu Zhongyuan, deputy director of the Development Research Center of the State Council, or China's cabinet, in a January report for China Daily.

Rather than using their vast financial firepower, the Chinese authorities have been taking a softly-softly approach to slowing growth. They have had more room to manoeuvre since inflation started easing. Despite what was seen as a one-off jump in January, inflation in China has been cooling from its peak in the summer.

Policy remains ‘tight’, meaning the authorities have lots of room to take measures to stimulate the economy, such as the cut to bank reserve requirements announced this week.

New data published today on Chinese manufacturing showed a slight improvement, adding to hopes that a soft landing will be engineered.