The population of China bears seems to keep growing. Thealready large colony of doomsayers can point to any number of legitimate troublesfacing China, from slowing exports growth to an aging population,from real estate excesses to a moribund consumer sector. They usethis long list to conclude that the Chinese economy could easilyface a cyclical stall, what some term a “hard landing.” But thereis a problem with their approach. Many of the issues to which thebears point will take years to have an effect. Other, moreimmediate problems are already dissipating. For all of China's veryreal difficulties, the country will likely experience a much softerlanding than the bearsfear.

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Recent disappointing economic indicators have three roots, allcyclical in nature: (1) slow expansion in the United States andrecession in Europe, (2) the legacy of China's past monetaryrestraint, and (3) a drop in residential real estate prices alongwith building activity. These are the key considerations for Chinaover the next 12 to 18 months. Its very considerable demographicissues and need to increase the consumer's place in the economicmix, critical considerations though they are, will play out over amuch longer time horizon and mean almost nothing for the outlook in2012-2013.

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Because exports are a primary engine of China's growth, it couldnot help but suffer from the subpar American recovery and outrightrecession in Europe. The European Union is China's largest exportmarket, and the United States its second largest. So far this year,China's exports have grown at an annualized rate just barely above9%, well down from the average expansion in the high-teens in 2010and 2011. Actually, given what is happening in Europe and the U.S.,the recent export performance shows remarkable resilience. Still,the slowdown has affected more general economic indicators, such asindustrial production, electricity generation and new purchaseorders from Chinese industry.

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There is little reason to expect much relief on the export frontany time soon. Even with recent progress dealing with its debtcrisis, Europe will take a long time to return to robust growth. Atbest, it will show very modest growth later in the year, and eventhat is in doubt. Nor does it look as if the United States willrecapture rapid growth any time soon. But if there is no reason tolook for much improvement on this front, neither is there reason toexpect matters to get much worse. The probabilities suggest nothingmore severe going forward than the present subpar performance.

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If the export picture for China is still dim, things areimproving on the policy front. Last year, fearing a rise ininflation toward 8% or more, Beijing ordered the People's Bank ofChina (PBOC) to drain liquidity from the Chinese financial system.It did so several times by raising its benchmark interest rate andthe reserves it requires banks to hold against their loans anddeposits. The lingering effects of that restraint still weigh onthe economy. But now, with inflation back down to a much moreacceptable annual rate of 2% to 3%, the PBOC has begun to reverseits policy stance, cutting its benchmark interest rate and reducingrequired reserves. Some have expressed concern that the policyshift is too late and too little. They worry about a “liquiditytrap” in which monetary easing loses its economic effect. But suchfears are misplaced. Not only is there always a lag between apolicy shift and its effect on the economy, but even as early asMay, lending began to pick up in China, rising to 793 billion yuan($125.6 billion) that month, fully 16% above April levels.

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China's real estate problems also show somesigns of improvement. Prices are down some 25% from their peak acouple of years ago. Building activity is accordingly slow. But ifthe sector hardly adds to growth, it would be a mistake to drawparallels between China's real estate problems and America's. WithChinese law insisting on 20% down on a first residence and 50% on asecond, Chinese homeowners are much less leveraged than Americans.China's debt lies largely with local governments, and while that'shardly welcome, it's much easier for Beijing to cope with than thewidespread subprime debt was for Washington. China can also lookforward to faster work down of excessive housing inventories. ManyChinese have already begun to take advantage of now reducedmortgage rates, especially discounts of 15% for first-timehomebuyers. More fundamentally, there are 11 million marriages ayear in China and some 10 to 12 million people a year migrate tourban areas from the countryside. Major cities already reportincreased transactions, and recent month-to-month price figuresshow stability.

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Longer term, China undoubtedly faces a difficult economicrestructuring. Beijing is well aware that, quite aside from therecent export slowdown, it cannot sustain its past pace of exportgrowth. That remarkable achievement reflected a tremendous increasein China's share of the global market, from something negligible 20years ago to some 12.5% of the global total last year. Since thecountry cannot hope to redouble this gain, Beijing increasingly hasturned to domestic development as an additional engine of growth,especially aiming to enhance the consumer sector, which now amountsto a mere 40% of the economy (compared to 70% in the United States,for instance). Part of China's massive infrastructure spending aimsto serve this need. But it is clear that the transition itself willslow growth, and domestic development naturally proceeds lessrapidly than export-led growth. If this fundamental adjustmentworks smoothly, the country can avoid too adverse an economiceffect. Otherwise, the adjustment could cause major disruptions.Either way it will be a matter for the long term and has little todo with the economy's immediate landing, hard or soft.

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China's demographic reality will also impinge on its longer-termprospects. Because the country has imposed a one-child policy onfamilies for the last 30 years, the flow of young entrants to theworkforce has slowed and will continue to do so in future years.This trend cannot help but hold back the pace of overall economicgrowth. But it would be a mistake to make too much of this problemtoo soon. The legacy of what was an extremely youthful populationstill leaves China with a greater abundance of young workers thanthe United States, for instance, and certainly more than in Europeand Japan. China today still has almost nine people of working agefor each person over 65 years, compared to just over five ofworking age in the United States and just under three in Japan.Even by 2020, China, according to United Nations estimates, willstill have almost six people of working age for each person over65. The United States will have less than four and Japan will havebarely two. It is a developing economic constraint to be sure, andwill in time become severe, but it has little place in anassessment of the next 12 to 18 months.

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Against such a background, there can be little doubt that Chinawill grow at a slower pace this year and next for cyclical reasonsand longer term for structural and demographic reasons. For theperiod immediately ahead, relief should come from the policy shiftalready in progress and because the worst of the residential realestate pressure seems to have passed. China looks likely to meetthe official expectation of 7.5% to 8% annualized real GDP growthover the coming 12 to 18 months. More fundamental considerationsshould slow growth in subsequent years, though the great potentialfor domestic development still suggests that China can sustaingrowth of close to 6% a year. While all these expectations—short,intermediate, and longer term—fall far short of China's past growthof 10% to 12% a year, investors and business people need to keep inmind that the anticipated pace still exceeds that expected for theUnited States near term by a factor of almost four. It is also mostdefinitely a softer landing than the bears suggest.

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