China’s Economic Landing: Hard or Soft?

The Chinese economy saw its gross domestic product (GDP) slow to 9.1% in the third quarter, down from 9.5% in the second quarter and over 10% in 2010. GDP is at its lowest growth rate since the Chinese economy expanded at 8.9% back in the third quarter in 2009. China's economy is slowing...will the landing be hard or soft?The Chinese economy saw its gross domestic product (GDP) slow to 9.1% in the third quarter, down from 9.5% in the second quarter and over 10% in 2010. GDP is at its lowest growth rate since the Chinese economy expanded at 8.9% back in the third quarter in 2009.

The Chinese economy may be slowing, but the growth is still staggering given the muted growth in the United States and Europe.

In early 2011, I said that China’s decision to increase interest rates five times since October 2010 was needed and would be positive going forward, especially given the rapid rise in Chinese consumer inflation, which touched 6.5% in July. Tightening credit and the rules on real estate speculation and buying is clearly working by calming down the rise of property prices in China and driving inflation back to 6.1% in September.

The evidence of the Chinese slowing was evident in the recent export numbers from China. Yet, factory production in China increased 14.2% in the third quarter. Factories continue to produce, but at a slower rate, which is what the Chinese government wants. Slowing in the global economies is causing lower demand for cheap Chinese-made goods. The debt crisis is causing havoc in the eurozone.

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The International Monetary Fund estimates that China will expand its economy by 9.5% this year, which is still impressive considering that the U.S. economy is estimated to grow at 1.5%. Japan, now the poorer cousin of China, is expected to contract by 0.5%.

Pundits are warning of a hard landing in China; but I feel that the country could avoid this via its program of higher interest rates and tighter lending restrictions.

The reality is that the Chinese consumer is continuing to spend money. In September, retail sales in China grew a staggering 17% versus a muted 1.1% in the U.S.

The slowing is impacting Chinese stocks, both those in China and those listed on U.S. exchanges.

As I said, the important thing is the economic landing in China, whether it will be soft or hard. A hard landing would devastate stock markets around the globe.

While the current market risk with Chinese stocks is extremely high as the threat of global slowing continues, I continue to like the future for China as an economic powerhouse. However, we need to get past the near-term hurdles.

China will be fine as long as inflation continues to lessen and growth holds. Some pundits are suggesting that China’s GDP could decline to five percent by 2015, but the only way this would occur is if the global economies tank and fall into another recession.

And the fact that China is determined to drive domestic demand could only help maintain higher economic growth.