Over the past few years, China’s domestic stockmarket has been “a pretty reliable guidepost” to the economy. And “much better than the dubious official guidance”, says Alan Abelson in Barron’s. It’s not in a bullish mood, having lost around 20% this year.
Expectations are being scaled down. “Most China observers were not talking about any kind of landing three months ago,” says James Chanos of fund manager Kynikos. “Now they are confidently talking about a soft landing.” But fear of a hard landing – a sharp slowdown or a crash – is becoming more widespread.
The “warning light on China’s economy is flashing red” as it faces a “double whammy”, says Tom Orlik in The Wall Street Journal. The poor global economy, notably the crisis in Europe, China’s biggest trading partner, is denting exports. These rose at the slowest pace in two years in October. Then there’s the air hissing out of the property bubble. Property investment, land-transaction volumes and prices are down, as the central bank acknowledges. This is reflected in the latest survey of the manufacturing sector. For the first time in three years it slipped below the 50 mark separating expansion from contraction.
The government has already resorted to stimulus, allowing banks to keep less money on reserve so they can lend it out. But Beijing won’t be able to “repeat the massive stimulus package of 2008”. Then, a state-mandated lending spree caused an investment and building boom and propelled property investment to 13% of GDP, says Edward Chancellor in the FT. The International Monetary Fund thinks banks’ direct and indirect exposure to real estate is now almost 50% of outstanding loans, so a surge of bad loans over the next few years looks likely. The banking system is not “a free and clear open cheque book”, says Chanos. It’s “extremely fragile”.
The authorities may succeed in breathing some more air into the property and lending boom, but this would just imply a worse bust later. The broader issue, says Greg Canavan in The Daily Reckoning Australia, is why many investors are so confident that the central planners who caused the bubble can also “fix all the problems”. What if they can’t?