Chinese Economy Hard Landing

Chinese economic growth is slowing. The Chinese government published a 6.9% growth rate but many economists do not believe these numbers. Independent estimates range from 4.5% to 5%. Fortune quotes these numbers and says that it is no hard landing yet for China.

Chinese growth officially slowed to a 6.9% pace in the third quarter. Unofficially is another matter. Power output has been virtually flat in China this year and commodity imports are down sharply, signaling a more serious slump in the industrial sector. But consumer spending and services continue to rise.

Fortune’s Scott Cendrowski cites one estimate that puts the actual growth rate at 4.5%. The Economist parses the numbers and comes up with a growth rate of 5%. Either way, China’s growth is significantly slower than the official rate, but not in a hard landing.

However, if you look at the drop in imports to China and flat power consumption the picture looks worse than even the most pessimistic published estimates. The view when one looks at various specifics, is more consistent with a sharper drop in the Chinese economy and holds the potential for a hard landing.

Hard Landing

Investopedia provides a definition of hard landing.

An economic state wherein the economy is slowing down sharply or is tipped into outright recession after a period of rapid growth, due to government attempts to rein in inflation. A hard landing may be the undesirable consequence of efforts by a nation’s central bank to tighten monetary policy, so as to slow down growth and keep inflation in check. While a soft landing is generally the objective of such tightening measures, a hard landing may be the occasional – and unfortunate – result.

Interestingly they use China as an example.

For example, China’s rapid economic growth in recent years has often given rise to speculation about the possibility of a hard landing, in which the economy slows down from a double-digit rate to a growth pace in the low single digits. This could occur if measures by the Chinese government to tighten monetary policy slow down growth faster than it expects, or would like.

Thus a hard landing is defined by the abruptness as well as the depth of the economic downturn. China still has an official growth rate that would be envy of Europe or North America. However, many believe that by the end of the decade China will be happy to have a traditional North American or European growth rate in the two to three percent range! If that happens how will China get there and what will be the ramifications?

Political Instability in China

China is not a free society. It buys the support of the emerging middle class with economic success. A slowing Chinese economy is a problem for leaders in China and a hard landing could be a disaster. Al Jazeera reports of the prospect of political instability in China.

The CCP has long used seeking profit for the middle class as an excuse for putting economic opportunism above democratic reform. The effect of the financial downturn on the citizen’s wallets and savings is likely to challenge the CCP’s narrative and grip on power. A staggering 80 percent of urban Chinese have invested in some sort of equity, putting around 30 percent of their money into stocks, according to Credit Suisse, a leading global financial services company. And this is taking place as China’s tries to bounce back from the slowest growth rate since 1990. After hitting a record 10.4 percent growth in 2010, China’s economic progress has decelerated by around 30 percent over the past five years. This will create financial pressure for anyone in China looking for a stable middle class lifestyle, not just for those who own stocks.

The point being that a hard landing of the Chinese economy would greatly exacerbate unrest of the recently prosperous urban Chinese and lead many to openly question the capabilities of those in power and their right to govern!