Fears of China's hard landing 'unfounded'

July 8 2011 by Goh Eng Yeow

AN ECONOMIST here believes China's red-hot economy is unlikely to suffer the sort of crash landing that gives nightmares to stock traders and leaders of trade-dependent nations in the region.

OCBC economist Tommy Xie says he is confident that such a scary scenario is not on the cards, even though China's mighty manufacturing sector recently showed signs of flagging.

China is now a big export destination for Singapore and commodities-rich South-east Asian countries such as Malaysia and Indonesia, taking up between 8 and 12 per cent of their exports.
So even as investors ride the recent stock market recovery sparked by Greece avoiding a default on its €340 billion (S$595 billion) debt, they are looking north with trepidation to see if China's insatiable appetite for raw materials is sustainable.

At a seminar run by OCBC Bank yesterday, Mr Xie noted that for a country used to growing at an average annual rate of 10 per cent in the past 30 years, any halving of the annual growth rate would be considered a 'hard landing'.

Fortunately, there are plenty of cushions to keep the mainland economy humming along. Unlike heavily indebted European countries and Japan, China is relatively robust fiscally.

Even after throwing in all the local government debt, central bank bills, treasury bonds and other contingent liability, total debt accounts only for about 66 per cent of the mainland's gross domestic product (GDP). In contrast, Germany, Europe's strongest economy, has a debt-to-GDP ratio of 74 per cent, while Greece's debt-to-GDP is 150 per cent.

This gives China leeway in pumping huge sums into massive projects to help underpin its economic growth.

Said Mr Xie: 'In the next five years, China commits to build 36 million affordable housing units, a 2.8 trillion yuan (S$530 billion) budget for a high-speed train network and another 600 billion yuan for a west-to-east electricity transmission system.'

This will mark part of China's efforts to transform itself from an export-driven to a domestic demand-driven economy.

Mr Xie also noted that in its battle against inflation, Beijing had repeatedly asked banks to set aside more of their cash and reserves so they will not be lent.

In fact, it has done this 12 times in the past two years.

In contrast, Beijing has raised interest rates only three times this year. Mr Xie believes the latest interest rate hike on Wednesday will be Beijing's last this year.

'It is a reflection that Beijing understands that many small and medium- sized enterprises are struggling to get loans and hiking interest rates will only add to their burden,' he said.

Economists at other banks concurred with his views that there may be no further interest rate hikes in China this year.

In its Asian strategy report, Deutsche Bank's chief economist Jun Ma said he expects Beijing to hold its policy rates for an extended period, after the latest hike in one-year benchmark deposit rates and lending rates by 0.25 percentage point.

'We also believe the People's Bank of China may begin to modestly relax credit policies by the end of the third quarter,' he added.

But DBS Vickers analyst Chris Leung noted that further tightening in China may still be possible as the country's asset inflation problem has not been resolved, as property prices in many smaller Chinese cities continue to surge.


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