The outlook for China matters enormously to markets and the world economy.
So it’s a shame that the argument over whether or not it will have a ‘soft landing’ is framed so poorly.
What most pundits seem to mean by a soft landing is nothing of the kind. It doesn’t even qualify as a landing.
And they seem to be ignoring the risks for what is probably the most important sector in the world right now – Chinese real estate…
Real estate investment is slowing very fast
When analysts talk about a soft landing in China, they mean a scenario in which growth gently slows to around 8%. This is widely assumed to be the minimum growth figure the country needs to maintain a solid job market and generally keep its citizens happy.
This scenario seems unlikely to me, to say the least. Especially when you look at what’s going on in the Chinese property market.
Real estate investment grew around 28% year-on-year in 2011. But it has been decelerating sharply. The year-on-year pace was 25% in October, 20% in November and 12% in December.
Property accounts for around 13% of the Chinese economy directly and impacts on as much as 25% of GDP through related sectors. So a major slowdown here would inevitably be a serious drag on the economy.
In fact, it’s not much of an exaggeration to view Chinese real estate as the single most important sector in the world right now.
Chinese export manufacturing is facing slower demand from Europe and the rest of the world. The government seems unlikely – for now – to embark on the kind of aggressive stimulus it followed in 2008-2009. And consumer spending is obviously not going to fill the gap.
So why does this matter? Because most people seem to expect Chinese real estate investment growth of around 12-14% in 2012. That’s about half the 2011 pace, and would give you 8% overall GDP growth.
However, real estate is very cyclical. When it stops growing fast, it tends not to plateau, but to contract. And if real estate investment shrinks even a little bit, GDP growth is likely to be closer to 6%.
That might still seem pretty good. It’s certainly not a hard landing by any reasonable definition. But in an economy that has been growing as fast as China, that sort of shift in pace would be very noticeable.
Any drop may not show up fully in the headline GDP figures, which are measured year-on-year. But these tend not to capture the full extent of a slowdown, so long as growth picks up again relatively quickly.
Quarter-on-quarter growth was an annualised 8.2% in Q4 2011 from 9.5% in Q3, according to the official figures. I wouldn’t be surprised to see that rate drop much further in 2011. The ingredients are there for a much more abrupt change in the economy than most analysts want to admit.
China needs slower, better growth
This isn’t necessarily a bad thing. If growth falls because the government is deliberately trying to restrain property investment, it shouldn’t be seen as a sign of weakness. Rather, it reflects policies that should be beneficial in the long run.
I don’t believe the Chinese property bubble is anything like as big as some argue. But there’s absolutely no doubt that property developers in China are exactly the same as everywhere else: fond of piling on the leverage and overbuilding when times are good, then going bust when the cycle turns.
Western economies let real estate get out of hand and are now paying the price. Chinese policymakers are being more proactive: they’ve been clamping down on the industry for over a year.
For most of 2011, analysts constantly expected them to loosen curbs in the near future. That hasn’t happened. There have been some minor moves towards loosening monetary policy more broadly, but little relief for real estate.
Hopefully they’ll stick to this; an economy where real estate plays a smaller part will be a healthier one. But any move towards better quality growth will clearly reduce the growth rate – and not just for the next few months.
China’s trend growth rate has probably peaked. In hindsight, the mid-2000s will probably seem exceptional. With exports to the West now unable to grow so fast, the demographic dividend of cheap labour from the countryside getting smaller, and less scope for high levels of investment in real estate, the pace is likely to slow.
Indeed, the government’s target is now for 7% annual growth in 2011-2015, below the fabled 8% that analysts continue to use as a lower bound. A target has little value in itself: growth regularly beat official goals by a large margin in the past decade.
But the change suggests a shift in policy, where runaway sectors such as real estate will not be tolerated solely in the name of higher GDP.
So if China’s growth comes in lower than expected over the next year, it shouldn’t be seen as too alarming. In fact, if the brakes come off and real estate investment is allowed to accelerate again, that would be more worrying for the long-run health of the economy.
But whether the market will see it that way round is another question.