China: “No Hard Landing” Call Is Premature, As The Plane Has Not Even Descended14 June, 2011, 19:53. Posted by Zarathustra
Tags: Big Swinging Dick, Credit Suisse, Dong Tao, Economy, Hard Landing, Inflation, Tao Wang UBS
Some are very quick to celebrate that there will be no hard-landing in China after the inflation report which shows that CPI inflation reached 5.5% yoy in May, while industrial production is somewhat better than expected. Indeed, right up to the moment when the People’s Bank of China announced another hike in reserve requirement ratio, the equities market in Hong Kong seemed to have taken the inflation data as a good news.
For instance, this report from Reuters suggested that “China may avoid a hard landing”, saying that “the inflation data suggested Chinese price rises were not out of control and that growth was being managed”.
Likewise, Tao Wang at UBS is not worried much about hard landing, believing that policy is not overly tight. She said:
The market has been increasingly worried about a hard landing in China, but the latest data show that the economy is still going strong…
We think monetary and credit policy has not been overly tight, and will not be tighter in the remainder of the year, and we expect social housing construction to support overall property sector activity this year. Therefore, we see the current “soft patch” to last only a couple of months, and expect a rebound in sequential growth in Q3 as de-stocking ends and as social housing construction picks up. As CPI inflation has yet to peak, we continue to see two more rate hikes this year, all within the next 3 months.
The reality as I see it, however, is that the slight slowdown in the Chinese economy is still not enough to bring inflation and home prices under control. The data so far confirms my judgment that China needs to bring growth to a much lower level in order to bring prices down, and that would entail the need of a significant slowdown, or recession.
The bottom line is that we are seeing some slowdown in the economy as well as difficulties in small- and medium-sized businesses due to lack of credit, but the economy is still not slow enough. Although the global slowdown happening right now will certainly make policy makers in China more cautious about the pace of tightening, one should not be surprised to see further tightening in China in the coming months.
It is still too early to say for sure whether we are headed for a hard landing or not. If the Chinese economy is a plane flying in the sky, the call for no hard landing is premature at this point, simply because the plane has not even descended enough to land. But the probability of hard landing has certainly increased over the past few months, and will continue to increase as tightening continues.