The 2 Biggest Risks to a Chinese Hard Landing

This recent commentary from Societe Generale really cuts to the chase on China’s biggest risks highlighting the two big ones:

“Two types of events could trigger a hard landing in China. First, the experience of 2008 showed that the Chinese economy is vulnerable to trade shocks. The Lehman crisis made exports go into reverse, resulting in the loss of nearly 50 million migrant worker jobs in the two quarters after it took place. Second, a hard landing could be provoked by either insufficient public investment from Beijing or a sharp property market correction, which could also be partly induced by tight policies. Policymakers might choose to do so out of concerns over systemic risks posed by local governments’ unhealthy leverage or rising social discontent on
high housing prices. The point is that they would not deliberately choose to force a fast correction, but as China’s imbalances are already at a precarious level, the room for error and the likelihood of nasty unintended consequences is not negligible.

However, China is unlikely to experience a currency crisis like the Asian Financial Crisis, as it has little external debt and a still largely controlled capital account. The domestic financial market also lacks the clout to trigger a sharp correction, even though the dynamics there could aggravate the situation once the downward trend is set in motion.”

In other words, we’re still talking about an economy that is primarily driven by government spending and foreign trade.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Boston Larry

    Despite these risks to Chinese growth, Felix Zulauf is bullish on China and on FXI, and Alcoa’s CEO expects to export a lot of aluminum to China in 2013. Don’t the positives appear to outweigh the negatives currently?

  • Dar

    Hard landing is inevertible. Overcapcity is a major issue. There are way too many factories been built, especially excess in factories to build things to export as western consumers borrow money to buy them. Also, wealth inequality is terrible in this supposely communist land. Peasants and workers have little access to credits. Environment is not as before to favor entrupernum. Heavy government stimulas on infrastructure has reach ends. Few rich cannot consume overbuild products after export collapse.

    A bright spot is – the over capacity is factory, like US in the Great Depression, not consumption as UK in 1920s to 30s – the cradle to grave social welfare coupled with many overseas invention. Ironically, UK involved in today’s Iraq in 1920s! after they dismentaled Turkish Ottoman Empire. After economic resource is gone, UK was forced to adopt appeasement. Appeasement was NOT UK politician’s free choice, economic conditions force them to do. Nevertheless, this is another topic.

  • Alberto

    All massively unbalanced economies will balance sooner or later, so China will not be an excpetion but this is NOT tradable. Most of the discussions about China hard landing have no other scope than this “how can I trade this one, how can I make money shorting this or that ?” It’s very difficult if not overtly impossibile to trade this. And the conseguences of an hard landing can also be very difficult to understand because a big chunk of the chinese economy is unknown. Just as an example, in order to export money avoiding the capital controls, chinese imports are over reported and exports under reported, this is a fact but it’s difficult to gauge how much and who will be affected more. The global economy/society is too complex too be understood and models will fail in the future as they have failed in the past. Entrophy is a natural “force” which cannot be controlled.