A property sector downturn and slumping global demand might knock the Chinese economy into a hard landing this year, a senior government economist said, putting more pressure on Beijing to speed up economic reforms and to open up the market.
The economy is not just slowing, but is also haunted by over-investment that could constrain Beijing’s options, said Shi Xiaomin (石小敏), vice president of China Society of Economic Reform, a Beijing-based think tank.
“A hard landing of the economy is possible this year as slackening domestic and external demand pushes [full-year] GDP growth below 8 percent, probably even to 6-7 percent,” Shi said. “More worrying is that such a slowdown is going hand in hand with a sharp decline in the overall economic efficiency.”
The world’s second-largest economy might even slip into a period of deflation late this year or next year, he added.
Shi is an adviser to the government, specializing in reform. His think tank is a part of the National Development and Reform Commission, China’s top economic planner.
Fears of a hard landing in China have gained traction as a stream of recent data, especially disappointing trade and credit data, showed last month that the turbo-charged economy is faltering.
China’s manufacturing sector contracted this month for the fourth straight month as new export orders dropped sharply in the face of the eurozone debt crisis, the HSBC Holdings PLC flash purchasing managers index showed yesterday.
Shi’s outlook is a contrarian one in China. Most government economists do not expect a hard landing, which in the Chinese context is typically defined as a sudden dip in quarterly GDP growth below 8 percent, which could lead to big job losses that pose a threat to social stability.
US economist Nouriel Roubini has flagged risks of a China hard landing after next year, mainly because of over-investment.
Chinese Vice President Xi Jinping (習近平) said during a visit to the US last week that China’s economic momentum would not falter as some economists have predicted and he said the economy faces no risk of a hard landing.
The last time the economy showed signs of a sudden slump, during the depths of the global financial crisis in 2008-2009, Beijing announced a 4 trillion yuan (US$635 billion) stimulus plan that helped it quickly return to double-digit growth.
However, the huge pump-priming sparked unfettered bank lending to local governments, resulting in piles of debt — officially estimated at 10.7 trillion yuan — that analysts fear could destabilize the economy.
China’s property sector has begun to cool, with housing sales in some cities falling sharply as Beijing’s heavy-handed tightening measures unveiled since 2009 start to bite.
However, Shi warned that a downturn in property investment, which accounts for an eighth of GDP, as shrinking land sales hit local government revenues, possibly forcing them to default on loans.
China’s banking regulator has issued guidance to banks to roll over some of their loans made to local governments to ward off a potential wave of defaults.
China cut banks’ required reserves on Saturday to support the economy that is widely expected to slowing this quarter for a fifth consecutive quarter. The market consensus is for this year’s full-year growth to have slipped to 8 percent of 9 percent.