The population of China bears seems to keep growing. The already large colony of doomsayers can point to any number of legitimate troubles facing China, from slowing exports growth to an aging population, from real estate excesses to a moribund consumer sector. They use this long list to conclude that the Chinese economy could easily face a cyclical stall, what some term a “hard landing.” But there is a problem with their approach. Many of the issues to which the bears point will take years to have an effect. Other, more immediate problems are already dissipating. For all of China’s very real difficulties, the country will likely experience a much softer landing than the bears fear.
Recent disappointing economic indicators have three roots, all cyclical in nature: (1) slow expansion in the United States and recession in Europe, (2) the legacy of China’s past monetary restraint, and (3) a drop in residential real estate prices along with building activity. These are the key considerations for China over the next 12 to 18 months. Its very considerable demographic issues and need to increase the consumer’s place in the economic mix, critical considerations though they are, will play out over a much longer time horizon and mean almost nothing for the outlook in 2012-2013.
China’s real estate problems also show some signs of improvement. Prices are down some 25% from their peak a couple of years ago. Building activity is accordingly slow. But if the sector hardly adds to growth, it would be a mistake to draw parallels between China’s real estate problems and America’s. With Chinese law insisting on 20% down on a first residence and 50% on a second, Chinese homeowners are much less leveraged than Americans. China’s debt lies largely with local governments, and while that’s hardly welcome, it’s much easier for Beijing to cope with than the widespread subprime debt was for Washington. China can also look forward to faster work down of excessive housing inventories. Many Chinese have already begun to take advantage of now reduced mortgage rates, especially discounts of 15% for first-time homebuyers. More fundamentally, there are 11 million marriages a year in China and some 10 to 12 million people a year migrate to urban areas from the countryside. Major cities already report increased transactions, and recent month-to-month price figures show stability.
Longer term, China undoubtedly faces a difficult economic restructuring. Beijing is well aware that, quite aside from the recent export slowdown, it cannot sustain its past pace of export growth. That remarkable achievement reflected a tremendous increase in China’s share of the global market, from something negligible 20 years ago to some 12.5% of the global total last year. Since the country cannot hope to redouble this gain, Beijing increasingly has turned to domestic development as an additional engine of growth, especially aiming to enhance the consumer sector, which now amounts to a mere 40% of the economy (compared to 70% in the United States, for instance). Part of China’s massive infrastructure spending aims to serve this need. But it is clear that the transition itself will slow growth, and domestic development naturally proceeds less rapidly than export-led growth. If this fundamental adjustment works smoothly, the country can avoid too adverse an economic effect. Otherwise, the adjustment could cause major disruptions. Either way it will be a matter for the long term and has little to do with the economy’s immediate landing, hard or soft.