Chinese economy will not hit hard

China’s economic growth is slowing. This is not uncommon for an economy that relies on exports and suffers from shrinking global demand. But the economic slowdown that China is about to face is actually controllable and timely, so the fear of a "hard landing" is too exaggerated. There is no doubt that all economic data has gone down. The Purchasing Managers Index is now close to the “50” mark, and this point has always been the dividing point for production expansion and contraction. And a number of other important indices – from consumer expectations, money supply, stocks to steel production, industrial product sales, and new projects – have seen similar downward trends, but this is not 2008.   At that time, global business collapsed, and total world trade was likely to fall by 10.7% from 2009 – the most severe contraction since the 1930s. As a result, China's exports have turned sharply from the 26% annual growth rate in July 2008, and a 27% decline in February 2009. Under this influence, the GDP growth rate is only one digit left and the number is small - even if it is stopped by the Chinese standard. At the same time, more than 20 million migrant workers are unemployed in Guangdong Province, where the export economy is dominant. By the end of 2008, China was almost on the verge of a full-scale recession. But China got rid of this predicament in early 2009 with huge fiscal stimulus. But it also paid a price for the investment boom funded by the bank. Local government debt surged, and the ratio of fixed-asset investment to GDP also reached an unprecedented 50%. People are afraid of another banking crisis, fearing that the huge asset bubble is about to burst and inflation that cannot be contained. A deep European crisis has added to the situation, so that everything in 2008 seems to be repeating itself. These unique problems in China have their own facts, but they do not mean the appearance of a hard landing. Although local governments currently have a total debt of nearly 1.7 trillion, most of which was owed between 2008 and 2009, and the link between the banking sector and these debts will undoubtedly increase the amount of non-performing loans. But the fear of a deterioration in the quality of loans is a bit exaggerated. The author's judgment is that with 310 million rural residents entering the city in the next 20 years, most of the surplus housing supply will be digested. Take Shanghai Pudong in the late 1990s as an example. Today's “ghost towns” in China will become urban centers in the near future. At the same time, banks with large deposits have sufficient liquidity to absorb potential losses; the entire banking system has a loan-to-deposit ratio of only about 65% – according to the results of the Xerion research group of Perella Weinberg Partners' investment bank, before the crisis This ratio will rise to nearly 120%. The Chinese real estate market will not collapse. Yes, real estate construction fever and excessive speculation have occurred. But a year and a half ago, the government set out to crack down on buying multiple homes—the buyer had to pay 50% and 100% of the rent for the second and third homes, respectively. However, although this has curbed many speculations, house prices have remained at a high level – suggesting that China’s growing middle class is still unable to afford housing prices. China’s economic growth is slowing. This is not uncommon for an economy that relies on exports and suffers from shrinking global demand. But the economic slowdown that China is about to face is actually controllable and timely, so the fear of a "hard landing" is too exaggerated. There is no doubt that all economic data has gone down. The Purchasing Managers Index is now close to the “50” mark, and this point has always been the dividing point for production expansion and contraction. And a number of other important indices – from consumer expectations, money supply, stocks to steel production, industrial product sales, and new projects – have seen similar downward trends, but this is not 2008. At that time, global business collapsed, and total world trade was likely to fall by 10.7% from 2009 – the most severe contraction since the 1930s. As a result, China's exports have turned sharply from the 26% annual growth rate in July 2008, and a 27% decline in February 2009. Under this influence, the GDP growth rate is only one digit left and the number is small - even if it is stopped by the Chinese standard. At the same time, more than 20 million migrant workers are unemployed in Guangdong Province, where the export economy is dominant. By the end of 2008, China was almost on the verge of a full-scale recession. But China got rid of this predicament in early 2009 with huge fiscal stimulus. But it also paid a price for the investment boom funded by the bank. Local government debt surged, and the ratio of fixed-asset investment to GDP also reached an unprecedented 50%. People are afraid of another banking crisis, fearing that the huge asset bubble is about to burst and inflation that cannot be contained. A deep European crisis has added to the situation, so that everything in 2008 seems to be repeating itself. These unique problems in China have their own facts, but they do not mean the appearance of a hard landing. Although local governments currently have a total debt of nearly 1.7 trillion, most of which was owed between 2008 and 2009, and the link between the banking sector and these debts will undoubtedly increase the amount of non-performing loans. But the fear of a deterioration in the quality of loans is a bit exaggerated. The author's judgment is that with 310 million rural residents entering the city in the next 20 years, most of the surplus housing supply will be digested. Take Shanghai Pudong in the late 1990s as an example. Today's “ghost towns” in China will become urban centers in the near future. At the same time, banks with large deposits have sufficient liquidity to absorb potential losses; the entire banking system has a loan-to-deposit ratio of only about 65% – according to the results of the Xerion research group of Perella Weinberg Partners' investment bank, before the crisis This ratio will rise to nearly 120%. The Chinese real estate market will not collapse. Yes, real estate construction fever and excessive speculation have occurred. But a year and a half ago, the government set out to crack down on buying multiple homes—the buyer had to pay 50% and 100% of the rent for the second and third homes, respectively. However, although this has curbed many speculations, house prices have remained at a high level – suggesting that China’s growing middle class is still unable to afford housing prices. Despite this problem, the most important imbalance in the Chinese real estate market should be in the expectation of the next 20 years. There may be an imbalance between supply and demand every year, but it is expected that the rural new urban population with an annual average of 15 million will push demand to the level of supply. In addition, inflation has always been a serious risk for China – especially when newspaper headlines are filled with news that the Consumer Price Index (CPI) broke the 6% mark this summer. The government has also responded strongly in four areas. First, the government has issued administrative measures aimed at reducing fuel costs and eliminating bottlenecks in pork, edible oil and vegetable supply, in response to food inflation, which accounts for nearly half of the recent overall price increase. Second, in order to curb excessive bank loans, the deposit reserve ratio has been raised nine times in the past 11 months. Third, the rate of appreciation of the renminbi has accelerated. Finally – and perhaps most importantly – the People’s Bank of China has raised the benchmark policy rate five times since October 2010. The current one-year lending rate is 6.5%, which is 0.3% higher than the inflation rate reported in the August newspaper. If food inflation is further reduced, and the publicly reported inflation rate is gradually moving closer to the core (non-food) inflation rate of 3%, the result is equal to the “negative monetary tightening” of constant prices (after deducting price factors) – and this is easy All of the above-mentioned needs of the Chinese economy that has incurred inflation mean that there is a silver lining. An increasingly unbalanced Chinese economy cannot sustain a 10% growth rate for a long time. Unless the European collapse, the serious external demand shocks that erupted in 2008 will not reappear, so there is reason to believe that China will achieve a soft landing with GDP growth of about 8%. A slowdown towards a more sustainable path is a blessing for China, an economy that has long been plagued by excessive resource consumption, labor market bottlenecks, excessive liquidity, huge foreign exchange reserves and inflationary pressures. The recent development of the global situation has a deeper meaning. This export-oriented economy has received the second most serious warning in three years. The two major export destinations – first of all the United States and now Europe – are in serious problems and cannot continue to be reliable and sustainable sources of external demand. So people began to question how China's strong export-oriented growth model should be maintained. China has no choice but to implement the measures to promote consumption in its 12th Five-Year Plan as soon as possible. In fact, the strategic transformation runs through modern China. It happened once at the beginning of economic reform 30 years ago, and now it must be achieved again. For China, a soft landing will provide a window of opportunity to advance the arduous and increasingly urgent economic rebalancing process.  

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