China is in for a hard landing: Xie

"The development of China's property market is the determining factor for a hard landing or a soft landing."

Andy Xie, Morgan Stanley economist

China's economy is likely to experience a hard landing, as the nation's property sector is close to bursting due to excessive investment over the past years, a Morgan Stanley economist said in Taipei yesterday.

The remarks came as Beijing tightens its grip on credit in an attempt to steer China's overheated economy to a soft landing.

"The development of China's property market is the determining factor for a hard landing or a soft landing, rather than the government's policies," Andy Xie (謝國忠), a Morgan Stanley economist with a specialty in Chinese economy, said at a seminar on regional industrial development.

"Beijing's current measures only put a lid on land use, but scarcely have any effect on slowing the expansion of China's property sector," Xie added.

The huge investment in the property sector has been one of the major forces driving China's economic growth over the past few years, and the crash of the housing industry could cause a setback for the economy, the Hong Kong-based economist explained.

Xie, 44, known for his straightforward attitude, said in late April that Asian equities markets had peaked following the announcement by Chinese Premier Wen Jiabao (溫家寶) that Beijing may "take effective and very forceful measures" to rein in China's economy.

Taiwan's benchmark TAIEX has fallen 18 percent since then, closing at 5368.02 points yesterday.

At yesterday's seminar, Xie maintained his downbeat perspective, saying Asian stock markets "have not hit the bottom yet," as the interest rate hike by the US Federal Reserve on Wednesday will attract hot money back to US stock markets.

Xie said that Asian stock markets could rebound after the Fed completed its series of interest rate hikes this year.

Once again, the Morgan Stanley economist went against the grain by predicting that the weakening housing market would put a sudden brake on China's economic growth, despite the hopes of Chinese officials to fine-tune the overheating economy.

"Yes, there are numerous rich people who can afford luxury apartments, but the number is not big enough to level off the surfeit," he said.

This year, around 650 million square meters of real estate are waiting for buyers, compared to 550 million square meters last year, according to Xie.

To spur demand, a drastic 20 percent to 30 percent drop in prices will likely occur, whereas a drop of 10 percent or less would be necessary to give China its much anticipated soft landing, Xie said.

"In that case, [property developers] will stop investing as the profits will be squeezed," he said.

China's possible hard landing will have a severe impact on Japan and South Korea due to a reduction in equipment imports, which is happening now, Xie said.

As for Taiwan, Xie said "the impact will be very limited, as Taiwan is gradually relying on private consumption, not exports, for growth."

When asked which sector would be a good investment target, Xie suggested investors shift from tech firms to companies which can cater to customers' needs through intensive networks, or that have brandname products with high growth. He also cited Wal-Mart Stores Inc, the world's biggest retailer, as a good example.

"Tech shares no longer enjoy a high return, as the sector is maturing," Xie said.