Tuesday, 27 December 2011

Hard landing in China? Not in 2012: analysts

Politics is the main reason - it’ll be a year leading up to a power transfer in early 2013

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Guanyu ้“ said...

Hard landing in China? Not in 2012: analysts

Politics is the main reason - it’ll be a year leading up to a power transfer in early 2013

By SHU-CHING JEAN CHEN
27 December 2011

If China is headed for a hard landing, it is unlikely to happen in 2012.

The primary reason quoted by analysts is politics. In a year of a power transfer, a China landing, soft or hard, would resemble more a slow-motion drama than an action film. Its day of reckoning will be delayed by a government determined to defend the Communist Party’s image and its economy by all means possible, ahead of the handover to the next central leadership in March 2013.

The second reason is fundamentals. The central government is backed by years of fiscal surpluses outstripping its GDP growth - so much so that it has become a subject of scorn at home. One analyst compared it to an imperial court.

Still, the right question to ask in the coming year is no longer how fast China will grow, but how quickly it will slow down, and then rebound.

The implications for the global economy cannot be overstated. China likely accounted for 42 per cent of global growth in 2011 on a purchasing power parity basis and, together with India, is poised to contribute almost 60 per cent of global growth in 2012, according to Nomura.

The official Xinhua News Agency captured the mood of China’s top leaders gathering for the nation’s top economic-planning session called the Central Economic Working Conference held each year in mid-December with the headline: ‘Shifting Economic Growth to Self-sufficiency’.

The leaders themselves summarised the theme in 2012 in four words: ‘pursuing progress amid stability’ - terms that are not exactly worry-free in China’s cryptic official vocabulary.

The challenges are many. President Hu Jintao and his top lieutenant Premier Wen Jiabao spoke at the conference of the ‘very significant conflict and problems in the nation’s unbalanced, inconsistent, unsustainable economic development; the coexistence of downward pressure on economic growth and upward pressure of price inflation; the difficulty faced by some enterprises; the obstacles on the road to energy savings; and lurking risks in finance’.

The worry about inflation and the announcement to keep the yuan’s exchange rate stable are at odds with the expectation of Goldman Sachs, said its economist Yu Song. Goldman thinks that the fight against inflation is largely over. It also spots a shift to allow a weaker yuan to stabilise exports - a sector on which many small and medium enterprises depend for their survival.

The leadership also surprised the market by leaving no doubt about its stand on real estate. It declared ‘an unswerved insistence on micro-managing policies of the real estate industry’.

Beijing seems to be more worried about China’s economic development than most analysts in the region. HSBC and Merrill Lynch both predict 8.6 per cent GDP growth in 2012, down from 9.2 per cent in 2011.

CLSA’s Francis Cheung, head of China and Hong Kong strategy, went further by suggesting that things are ‘getting easier’ for China. He expects the Chinese authorities to start pump- priming the economy through loosening credit. CLSA’s economists forecast a rise in China’s growth trajectory from the nadir of 8 per cent in the first quarter of 2012, all the way back to a quarterly 9 per cent growth by year-end.

The gloomiest assessment so far comes from Nomura’s team. Its China economists Zhiwei Zhang and Wendy Chen predict Chinese GDP growth will slide to 7.9 per cent in 2012 - the first below-8 per cent performance since Asia’s regional financial crisis in 1997-98.

Guanyu ้“ said...

‘Exports will be a headwind, but we do not expect deep negative growth like in the first half of 2009,’ they write in a year-end report. ‘Instead, the main drag on GDP will be a pullback in property investment, with likely knock-on effects on heavy industry, such as steel and cement, and possibly wealth effects on consumption.’ They see a one-in-three probability of a hard landing commencing before end-2014.

Merrill Lynch’s China economist Ting Lu, in contrast, expects China to achieve a soft landing in 2012.

‘We think the property market is easier to manage for China than exports, which are totally out of its control,’ he said in a recent briefing, while also acknowledging the major domestic risk is ‘a possible plunging’ in fixed-asset investment by developers.

Mr. Lu’s main calculation of a soft landing also lies in property. ‘Social housing will be a crucial factor. We don’t doubt the Chinese government’s determination in building more social housing (for the low-income group),’ he said.

But China’s property sector is where consensus is hardest to find.

For CLSA’s Mr. Cheung, a property bubble in China is virtually non-existent. He tracked property prices in the first-tier cities in the 10 years to 2011 and found their pace of growth has been slower than GDP growth and that the affordability ratio is within a 41 per cent tolerance band of per capita disposable income. He said China’s problem is a wealth gap, not a property bubble. Because of the low leverage of China’s homebuyers, he feels the risk in the New Year is in property policy itself.

For China’s leaders, however, the wealth gap is a problem that cannot be taken lightly - certainly no less so than a property bubble. As 2012 will make clear, there won’t be an easy way out for either issue.