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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 7, 2012 at 10:07 AM

China may not be able to avoid a hard landing

The anxiety about China pre-dated Beijing’s announcement this week cutting its growth forecast for the first time in eight years. It was one element of the pullback from the rally on Wall Street. The concerns were nicely encapsulated in a January Societe Generale report to clients. Warning that China is entering “the danger zone,” it pointed to slowing construction and exports, “the two main legs of China’s growth.”

In addition, “Housing demand is slowing, property developers are slashing prices to clear out inventories and pay back their loans and land sales are falling, putting further pressure on already tight local government finances.” Sounds almost American. SocGen analysts were pessimistic about new stimulus because of an already high debt and deficit burden. “Chinese authorities have started to ease monetary policy…, encouraging lending to SMEs, etc.), although the size of the shadow banking system casts some doubt about the degree of control the People’s Bank of China has on the overall financing system.”

Like America, China needs a reset. But in China’s case that means a move toward more domestic consumption and less reliance on exports and bubble-driven building. Rebalancing toward more consumer goods, health-care products for an aging population and energy efficiency might even open opportunities for imports — if China played by Western trade rules (the report doesn’t address that).

A hard landing is as possible as an artful rebalancing, particularly for an economy so dependent on exports. China has been leading the world out of recession. A Chinese contraction would be widely felt, not least in Washington state. It’s also a tricky time, with a leadership transition taking place in Beijing and the Communist Party’s constant fears of domestic trouble. Or maybe China will muddle along, like America, until it can’t any more. Bad habits are hard to break.

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