NZ Herald business editor at large

Liam Dann: China hard landing may be still to come

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IMF warns that measures China is taking to deal with its debt could make matters worse, writes Liam Dann.
Liam Dann, New Zealand Herald business journalist. Photo / Michael Craig.
Liam Dann, New Zealand Herald business journalist. Photo / Michael Craig.

At the start of the year, China's hard landing seemed imminent.

The Shanghai market plunged on the first day of the year sparking a global panic.
Though we're constantly reminded that Chinese markets aren't reflective of the economy, there were fears their volatility was a sign the central Government had lost control.

There were fears for the value of the yuan as the US dollar recovered and lot of talk about the risk of capital outflow as Chinese investors sought to get funds out of the country.

The IMF downgraded global growth projections citing China and a "faster-than-expected slowdown in imports and exports, in part reflecting weaker investment and manufacturing activity".

But far from sliding into meltdown territory, the situation in China seems to have stabilised.

Markets have bounced. The Shanghai Composite is still down on last year's peaks, but is up more than 10 per cent since the end of January.

Capital outflows have stabilised, GDP has come in on target at 6.7 per cent and we're even starting to see signs of life in key economic statistics.

March manufacturing data came in above predictions for the first time in 12 months and the property market has come back with a vengeance.

For the 12 months to the end of March prices for new-built houses in Beijing were up 16 per cent and in Shanghai they went up 25 per cent, according to Trading Economics.
So what's happened?

Well, though there hasn't been an official programme of stimulus unleashed by the Government, there have certainly been some policy changes that have loosened credit conditions

Banks have been encouraged to lend, businesses have been encouraged to borrow and some of the property restrictions in some cities have been relaxed.

The immediate risk of financial or economic meltdown seems to have been averted. But that's got many Western commentators concerned that China's efforts to confront the big challenges of its economic rebalancing have simply been delayed. Worse than that, some are suggesting, a fresh round of debt-fuelled growth increases the risk of creating a bubble and causing an even harder landing in the long term.

The Financial Times reports that China's total debt hit 237 per cent of GDP by the end of the latest quarter. Even more worrying to some is that corporate debt in China has risen to about 160 per cent of GDP,

George Soros, the savvy US billionaire investor, made headlines recently by saying the new surge in stimulus was putting China into territory reminiscent of the US prior to the global financial crisis of 2008.

China's Government has "re-lit the furnaces. They also induced a construction and real estate boom. It is a bubble but it can grow and it can feed on itself. And markets are not infallible and they buy into it and of course that is another factor that makes it grow," he said. Effectively China has managed to delay the inevitable, he argues, but in doing so has exacerbated the problem.

"(Stimulus) can buy you additional time but it makes the problem that much bigger. That's where we are."

The Chinese economy never seems to do things by half and there are always plenty of worrying trends to highlight if you look hard enough.

Bloomberg has been reporting on a dramatic surge in investors betting on commodity futures as China's demand for steel minerals surges back in to life. Last week the International Monetary Fund, in its regular blog posting, warned that measures China was taking to deal with its debt could make things worse. The IMF highlighted two specific issues - the conversion of non-performing loans to equity and the packaging of bank loans into marketable securities - as high risk solutions. "They are not comprehensive solutions by themselves," The IMF official wrote in the blog. "Unless they are carefully designed and part of a sound overall framework, they could actually worsen the problem, for example, by allowing "zombie" firms (non-viable firms that are still operating) to keep going."

Other commentators are more bullish. Soros' former colleague, hedge fund manager Bob Bishop, says he's wrong. He's picking China has already had its hard landing for this current economic cycle and the next two years will see more stable growth.

China's goal to shift from factory based production to a higher quality technology and services-led growth is no easy mission.

There's no doubt progress is being made. But big risks remain.

Debate on this article is now closed.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

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