We think China will experience a bumpy landing, different from either soft or hard landing. Beijing can prevent a hard landing, given its control over the economy and its fiscal capacity. However, the economic imbalance after years of lopsided, investment-driven growth are too great to be resolved without pain, and the fragile global recovery adds further to the difficulties. While external volatility and domestic social tensions call for faster reforms, various vested interests within the political structure could slow the pace of necessary reforms. Correction of existing asset bubbles, as well as the lack of pre-emptive and concerted reform planning, will make the process of landing very bumpy.
Another way to understand our “bumpy” landing view is that there is a certain amount of pain that has to be endured during its rebalancing towards a consumption-driven economy. Although the central government cannot make the pain go away, it is still able to spread the impact over several years, instead of having all existing investment bubbles blowing up in six to twelve months. In 2012, the housing market will be the first bubble to burst, while Beijing uses its power to sustain growth in other areas; and in 2013 and beyond, the government is likely to turn its attention to provide sustainable solutions to local government leverage and excess infrastructure investment. At the same time, private consumption will outperform, supported by rebalancing reforms and demographic trend, but will not be enough to make up the loss in growth resulted from correction of investments.
Given all the challenges at hand, we expect the Chinese economy to show below-potential growth and undergo recurring periods of great uncertainty in the next few years as economic rebalancing gradually takes place. A bumpy landing will also mean more volatility for the financial market.