The outlook for China matters enormously to markets and the world economy.
So it’s a shame that the argument over whether or not it will have a ‘soft landing’ is framed so poorly.
What most pundits seem to mean by a soft landing is nothing of the kind. It doesn’t even qualify as a landing.
And they seem to be ignoring the risks for what is probably the most important sector in the world right now – Chinese real estate…
Chinese Real Estate Investment is Slowing Very Fast
When analysts talk about a soft landing in China, they mean a scenario in which growth gently slows to around 8%. This is widely assumed to be the minimum growth figure the country needs to maintain a solid job market and generally keep its citizens happy.
This scenario seems unlikely to me, to say the least. Especially when you look at what’s going on in the Chinese property market.
Real estate investment grew around 28% year-on-year in 2011. But it has been decelerating sharply. The year-on-year pace was 25% in October, 20% in November and 12% in December.
Chinse property accounts for around 13% of China’s economy directly and impacts on as much as 25% of GDP through related sectors. So a major slowdown here would inevitably be a serious drag on the economy.
In fact, it’s not much of an exaggeration to view Chinese real estate as the single most important sector in the world right now.
Chinese export manufacturing is facing slower demand from Europe and the rest of the world. The government seems unlikely – for now – to embark on the kind of aggressive stimulus it followed in 2008-2009. And consumer spending is obviously not going to fill the gap.
So why does this matter? Because most people seem to expect Chinese real estate investment growth of around 12-14% in 2012. That’s about half the 2011 pace, and would give you 8% overall GDP growth.
However, real estate is very cyclical. When it stops growing fast, it tends not to plateau, but to contract. And if real estate investment shrinks even a little bit, GDP growth is likely to be closer to 6%.
That might still seem pretty good. It’s certainly not a hard landing by any reasonable definition. But in an economy that has been growing as fast as China, that sort of shift in pace would be very noticeable.
Any drop may not show up fully in the headline GDP figures, which are measured year-on-year. But these tend not to capture the full extent of a slowdown, so long as growth picks up again relatively quickly.
Quarter-on-quarter growth was an annualised 8.2% in Q4 2011 from 9.5% in Q3, according to the official figures. I wouldn’t be surprised to see that rate drop much further. The ingredients are there for a much more abrupt change in the economy than most analysts want to admit.
This isn’t necessarily a bad thing. If growth falls because the government is deliberately trying to restrain property investment, it shouldn’t be seen as a sign of weakness. Rather, it reflects policies that should be beneficial in the long run.
I don’t believe the Chinese property bubble is anything like as big as some argue. But there’s absolutely no doubt that property developers in China are exactly the same as everywhere else: fond of piling on the leverage and overbuilding when times are good, then going bust when the cycle turns.
Western economies let real estate get out of hand and are now paying the price. Chinese policymakers are being more proactive: they’ve been clamping down on the industry for over a year.
For most of 2011, analysts constantly expected them to loosen curbs in the near future. That hasn’t happened. There have been some minor moves towards loosening Chinese monetary policy more broadly, but little relief for real estate.
Hopefully they’ll stick to this; an economy where real estate plays a smaller part will be a healthier one. But any move towards better quality growth will clearly reduce the growth rate – and not just for the next few months.
China’s trend growth rate has probably peaked. In hindsight, the mid-2000s will probably seem exceptional. With exports to the West now unable to grow so fast, the demographic dividend of cheap labour from the countryside getting smaller, and less scope for high levels of investment in real estate, the pace is likely to slow.
Indeed, the government’s target is now for 7% annual growth in 2011-2015, below the fabled 8% that analysts continue to use as a lower bound. A target has little value in itself: growth regularly beat official goals by a large margin in the past decade.
But the change suggests a shift in policy, where runaway sectors such as real estate will not be tolerated solely in the name of higher GDP.
So if China’s growth comes in lower than expected over the next year, it shouldn’t be seen as too alarming. In fact, if the brakes come off and real estate investment is allowed to accelerate again, that would be more worrying for the long-run health of the economy.
But whether the market will see it that way round is another question.
Cris Sholto Heaton
Contributing Editor, MoneyWeek (UK)
Publisher’s Note: This article originally appeared in MoneyWeek (UK)
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PF probably the best economist that ever lived was Hyman Minsky.
His article on stabilizing an unstable economy is brilliant.
When a economy moves from real production and saving to a economy of consumer products and debt.
The only option is to start the printing presses with debt.
Thus US dollar holding (foreign reserves) will be worth very little to China.
Of course if we have another minsky moment of creditors wanting cash you could see a spike in the US dollar, however China will not beable to take advantage of that because it’s got too much debt in malinvestments anyway.
No way the US is going to allow China to dump it’s foreign holding and send US economy into meltdown.
Question you need to ask PF why has China not dump it’s US foreign holding already?
China is aware of the inflation risk to their US holding?
Because they know US will tell them to take a hike!
TRB – China has been selling US debt for some time, and they have been converting that into hard assets that can produce them the raw materials that their industry depends upon. They are no longer the largest holder of US treasuries. Hard appreciating assets are more attractive than depreciating US treasury notes attracting zip income.
http://www.thenational.ae/business/economy/china-sells-record-sum-of-us-debt
Google it – there are many articles. Naturally they can’t dump it entirely, or flood the market with many large sales, but they are reducing their holding. They also hold US debt as a strategy that they can use to keep the Yuan pegged to the dollar.
With all respect to Minsky, the USA could repay all of the public debt tomorrow just by printing some $1 Trillion dollar notes. The debts are $USD denominated.
So can Australia, Canada, the UK, and South Africa to name but a few.
Greece, Portugal, Spain, Italy, France, Germany, Ireland, and most of Europe can’t do that, although they will collectively print in the end. That will provide some benefit, but the individual countries can’t control the volume or the currency, so they don’t get the full benefit.
They have no other choice than to print one way or another. They can vary the volume printed, and the time frame – so that needs to be thought through if you have forex exposure.
Look the USA, the UK, and the EUzone is already printing, the only question is “how much?”
I don’t have money on any currencies, although holding assets in $AUD is a defact China play albeit accidental for me, but I am more comfortable with that, than holding $USD or the Euro at the moment.
Did you actually look at the house price/income ratio in China for that “Economist magazine” link I provided recently, the graph is trending DOWN and is lower than almost all countries, despite what is obviously over priced apartments market in the major cities. Most people in China do not live in major cities, although there has been high migration to the cities over recent years. Most still live in the country where housing is cheap.
Look at the housing market in South Africa – it’s astronomical. Do you see any articles on house prices in Sud Afrika? Prices rose 254% between 2000 and 2007.
We could point our fingers at many economies, but for my money Europe is the global weak spot – if you have a different thought, then fair enough. We each have the ability to form our own views, it’s not as though I have suddenly altered my long term view on China.
Cheers….
PF your commet naturally they can’t dump it entirely or flood the market is interesting?
WHY not PF?
Because what they are selling is peanuts compared to what they have in US bond market?
Interesting thing I like PF is you have a different view point from me about China that want makes the market bulls and bears.
Your emotional mood about China bullish story is very strong, many people think like you so the market stays up.
If your confidence about China is ever tested well that will be a minsky moment.
Well I think that your Minsky moment will arrive, but not today.
2015? 2020? 2050? 2112?
PF the impression I get is you take me as some sort of extreme China knocker?
You are wrong PF just reality no boom lasts forever over the long term China will do well.
It’s not about predicting the year PF it’s about staying out of high leveraged plays with no cashflow.
Many empty apartments in China with no cashflow, the normal worker cannot buy them or rent them, who will?
Any successful investor will tell you same thing PF it’s about finding a business with low debt and strong cashflow.
I’m not in the prediction business of what year it will happen only to stay out.
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