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Hard landing for China’s economy not in the tea leaves

A year ago, the news was full of articles about China trying to slow down its growth to align its speed with that of the rest of the world and to keep inflation in check. Now, everywhere in the press you read concerns about China’s slowdown. How fickle can the press and market investors be?

The press worries about economic hard landing in China

On Monday, CNN Money reported,

News of a slowdown in China’s manufacturing sector also exacerbated investors’ skittishness at the start of what will be a busy week on the economic and earnings front.

Likewise The Economic Times reported,

China’s manufacturing may shrink for a sixth month in April, maintaining pressure on officials to adopt more policies to stimulate economic growth, a survey of companies showed…. The contraction … would be the longest since the global financial crisis and may spur the government to lower banks’ reserve requirements a third time since November.

The astute reader may recall what the press has already forgotten: China wanted its economy to slow down and planned a year ago to create a slowdown in order to curb rampant inflation in its housing market. Obviously, you cannot have it both ways. So, no one should be concerned that China’s economy is slowing down according to plan.

Why do economics writers like those above suggest China should do anything to make its economy grow faster?

  • First, a slowdown in China is inevitable with demand from the U.S. and Europe ebbing.
  • Second, it has been announced and talked about as intentional for over a year!
  • Third, China is obviously not concerned about the past months of economic slow down, as it just raised the value of its yuan in relation to the U.S. dollar for the first time in who knows how long, which further diminishes the strength of its exports. (Mark, my word for the future: China has made its currency more convertible in order s to start moving the yuan toward being a global trade currency with the intention of supplanting the dollar. You heard it first here.)

Getting perspective on the economic slowdown in China

Sure, China has sloped gently down to 8.1% growth, but 8.1% growth is still such enormous growth that the U.S. would have envied that extremely high growth rate at any time during my life. People worrying over China’s drop to 8.1% growth would do far better to worry about the cost of tea in China.

China’s controlled decent is no different than an airliner coming in for a soft landing. The skillful pilots ease back on the engines to reduce both speed and lift and bring the big craft in gently. China, in fact, can decelerate a lot more and still come in for a perfect landing at a whopping 4% growth rate, which would be an enviable high-speed landing anywhere in the U.S. or Europe. One might almost call 4% growth “barreling toward the runway,” and China is currently going twice that fast! So, it has no risk of stalling.

If I were a conspiracist, I’d say the press was trying to take pressure off the U.S. and Europe by casting a spotlight on China; but I’m not a conspiracist, so I won’t say that. It’s just baseless hand wringing.

While some economists fret about the possibility of a Chinese economic crash on the runway, those close to the scene say …

“The numbers in recent months have never been that good but don’t show signs of falling off a cliff either,” Paul Cavey, a Hong Kong-based economist with Macquarie Se Macquarie Securities, said.

“The earlier easing measures have started to work and hence should ease concerns of a sharp growth slowdown,” Qu Hongbin, Hong Kong-based chief China economist for HSBC Holdings Plc, said in a statement.

Why there will be no Chinese economic crash

There will be no economic crash in the foreseeable future for China for a few reasons:
  • First, China, in its worst of recent times, is growing faster than the U.S. has even in its best of times.
  • Second, China has vast hoards of cash in currencies from all over the world and hoards of gold that it can always call into play to juice its own economy internally anytime it wants to; whereas, the U.S. and all of Europe have bottomless pits of debt. It can, in other words, easily push the throttles forward if its approach for landing is looking a little two steep. China’s reserves are deeper than the topsoil of Mississippi river-bottom land.
  • Third, China already has more nouveau billionaires than the U.S. While its top stratum is now flush with cash that it lavishes on Lamborghinis and classy Coach purses, it’s vast bottom sediment is a society used to lifetimes of austerity, so anything feels better than what they had.
There are two caveats here:
  • One is that Chinese numbers for every economic statistic from day one could be all wrong. China is a such a closed and long-controlled system that who can know if growth was ever as robust as its leaders have claimed? Communist leaders love to strut their stuff before the world. However, the high Chinese reserves and voluminous gold buying speak for the truth of the numbers. All that money is coming from somewhere.
  • Second, there is always the possibility of political upheaval as things slow down, now that China’s long-impoverished people have begun to taste prosperity; but, as I said, they are well adapted to austerity.
China will have a landing, of course, but a nice swift, smooth glide in … barring any political uprisings.
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