July 5, 2016    3 minute read

China: Hard Or Soft Landing?

Global Impact    July 5, 2016    3 minute read

China: Hard Or Soft Landing?

The state of the Chinese economy was in the spotlight in the last years as its growth rate decreased, creating many doubts. Because of this, the markets started talking about hard and soft “landing”. The “hard landing” is a scenario in which the economy has a sharp decline after years of significant growth. In contrast, the “soft landing” is a steady decline in the growth rate and it is often regarded as the objective of monetary policy, as the rate is high enough to avoid recession.

After these premises, it is important to know why Chinese landing is so significant and the significant data to look at.

The Chinese Engine

China is the biggest exporter of goods in the world, the most significant manufacturing economy and the largest trading nation. It is clear that, for these reasons, the country plays a primary role in international trade. China is also the second-largest economy by nominal GDP and the biggest contributor, in terms of percentage, to global growth. According to the IMF World Economic Outlook, published in October 2015, 43% of the global GDP growth rate from 2009 to 2015 was comprised of Chinese growth: this means it accounted for almost a half of the global growth, explaining why the Chinese risk has such a major effect on markets.

Furthermore, it is extremely important to consider exports to China: all the major countries have significant trading relationships with China. In particular, commodity producers who have been reliant on Chinese growth in recent decades, such as Australia, Brazil and South Africa, now have to face the biggest risk. China spends more on economic infrastructure annually than North America and Western Europe combined: a hard landing would probably entail great suffering for strictly dependent countries.

GDP annual growth rate is regarded as the most significant data to look at when talking about this issue and, of course, it is because it offers a general idea of how the nation’s economy is moving. The figures show the weakest growth since the first quarter of 2009: however, it is important to be careful and precise, in order to avoid wrong assumptions. Stephen Roach, Yale University senior fellow and former chairman of Morgan Stanley Asia, said that “you can’t look at top-line GDP and conclude about whether China is going hard or soft”, recommending, instead, to look at the single pieces. Following this direction, the economic outlook seems to be solid enough to avoid a hard landing: industrial output rose 6.8% year-on-year in March, beating market expectations of 5.9%. Fixed-asset investments increased by 10.7%, above market expectations of 10.3%. Retail sales data were also better than expected.

It is also interesting to analyse the GDP per capita adjusted by Purchasing Power Parity (PPP), as it is a good indicator of the economic performance of a country and, most of all, of the standard of living. In the last twenty years, the indicator increased from $2,774.78 in 1996 to an all-time high of $12,608.87 in 2014: it is clear that the country had a transition from developing to developed country.

China_GDP_Per_Capita_PPP_PPP_TMMChart.png

This trend seems to be reversing now, but it is uncertain whether the Chinese economy is going to face a recession or a soft adjustment: the short-term trajectory is uncertain but, on a longer term, a soft landing is more likely. However, it is important to keep an eye on new data releases and yuan movements, as they can deeply modify the current sentiment.

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