China economy faces risk of hard landing, says government economist
BEIJING, Feb 22 — A property sector downturn and slumping global demand may knock China’s economy into a hard landing in 2012, a senior government economist told Reuters, putting more pressure on Beijing to speed up economic reforms and to open up the market.
The economy is not just slowing but is also haunted by over-investment that could constrain Beijing’s options, said Shi Xiaomin, vice president of China Society of Economic Reform (CSER), a Beijing-based think-tank.
“A hard landing of the economy is possible this year as slackening domestic and external demand pushes (full-year) GDP growth below 8 percent, probably even to 6-7 percent,” said Shi.
“More worrying is that such a slowdown is going hand in hand with a sharp decline in the overall economic efficiency.”
The world’s second-largest economy may even slip into a period of deflation late this year or next year, he added.
Shi is an adviser to the government, specialising in reform. His think-tank is under the under the National Development and Reform Commission, China’s top economic planner.
Fears of a hard landing in China have gained traction as a stream of recent data, especially disappointing trade and credit data in January showed the turbo-charged economy is faltering.
China’s manufacturing sector contracted in February for the fourth straight month as new export orders dropped sharply in the face of the euro area debt crisis, the HSBC flash purchasing managers index showed today.
Shi’s outlook is a contrarian one in China. Most government economists don’t expect a hard landing, which in the Chinese context is typically defined as a sudden dip in quarterly GDP growth below 8 percent, which could lead to big job losses that pose a threat to social stability.
US economist Nouriel Roubini has flagged risks of a China hard landing after 2013, mainly due to over-investment.
China’s leader-in-waiting Xi Jinping said during a visit to the United States last week that China’s economic momentum would not falter as some economists have predicted, and said the economy faces no risk of a hard landing.
The last time the economy showed signs of a sudden slump, during the depths of the global financial crisis in 2008/09, Beijing announced a 4 trillion yuan (RM1.92 trillion) stimulus plan that helped it quickly return to double-digit growth.
But the huge pump-priming sparked unfettered bank lending to local governments, resulting in piles of debt — officially estimated at 10.7 trillion yuan — that analysts fear could destabilise the economy.
China’s property sector has begun to cool, with housing sales in some cities falling sharply as Beijing’s heavy-handed tightening measures unveiled since 2009 start to bite.
But Shi warned that a downturn in property investment, which accounts for an eighth of gross domestic product (GDP), as shrinking land sales hit local government revenues, possibly forcing them to default on loans.
China’s banking regulator has issued guidance to banks to roll over some of their loans made to local governments to ward off a potential wave of defaults.
China cut banks’ required reserves on Saturday to support the economy that is widely expected to slowing this quarter for a fifth consecutive quarter. The market consensus is for full-year 2012 growth to have slipped to 8-9 per cent.
“But monetary policy cannot solve structural problems,” Shi said.
China’s reforms were launched by former leader Deng Xiaoping in 1978 and gained steam after China’s entry into the World Trade Organisation in 2001, propelling the country’s break-neck growth in the past three decades, Shi said.
“Unfortunately, reforms have almost come to a standstill in recent years, especially concerning the monopoly,” Shi said.
State-owned firms have staged a come-back as they received the bulk of Beijing’s massive spending, sparking criticism that “the state advances and the private sector retreats”.
“There are growing calls for reforms, but such discussions are restricted to the academic circle,” said Shi, who was among economists who helped draft China’s reform plans in the 1980s to steer its transition from a planned economy.
Shi said “vested interests” — state giants in oil, power, railway and banking — are the biggest obstacle to reforms.
Premier Wen Jiabao has repeatedly called for accelerating reforms to help sustain economic growth, but Shi reckons that “stability” will be the watchword for the Chinese Communist Party ahead of its leadership transition in late 2012.
“If you don’t want to push reforms, the financial crisis may be an excuse to retreat. But if you want to reform, the crisis may well be an opportunity,” Shi said. — Reuters