Soft landing, hard landing or even a crash in China? It could be either of the last two but in no way will there be "no landing" for the high-flying economy, insisted Nicholas Lardy, senior fellow of the Institute for International Economics at a seminar yesterday. And, when China's economy does come down to earth, the impact on trade will be felt around the globe as well as in Asia, he suggested.
China's latest boom, which began in 2002, is being driven to an unsustainable extent by investment which is now running out at around 45% of GDP - a level unprecedented even in the days when Japan, South Korea and Taiwan were pioneering the Asian miracle. This cannot last and when it ends, domestic consumption, corporate profits and China's growth rate could plunge with it, said Lardy, an acknowledged China expert.
Others at the seminar on 'China and Emerging Asia: Partners for Growth' were more bullish. Victor Fung, chairman of Li and Fung, a Hong Kong trading group, suggested that the world has seen nothing yet when it comes to China's competitiveness in global markets. As the export processing sector becomes more integrated with domestic production, China's manufacturers will be able to create huge economies of scale, he suggested.
The soft landing scenario for China being promoted by many economists is "not reasonable", claimed Lardy, noting that there has been "massive wasted investment" over the past few years, leading to "huge overcapacity" in certain sectors. With negative real interest rates and a huge credit boom, plus effective depreciation of the yuan, both exports and domestic demand have become overheated.
Recent monetary tightening has slowed overall lending by 15% so far this year and Lardy predicts that the Chinese economy could shed as much as four or five percentage points of growth as a result. As China's past booms have run out after seven years from peak to trough, it may be another two years before the slowdown really bites, he said.
GDP growth "could well fall below 7%" by then and the corresponding drop in enterprise profits in China is likely to spur another surge in non-performing loans for an already overburdened domestic banking system. The bigger banks have been significantly reformed in recent years and smaller banks could well bear the brunt of the slowdown this time round.