China syndrome

The Chinese authorities have been taking actions for some time to cool the Chinese economy to allay fears of over-heating.  Inflation is high (6.2% in August) forcing the Financial Ministry into a tight money policy.   In addition, the Chinese are tightening requirements for home ownership to slow the red-hot property market.  It is always difficult to gauge what is going on in China and the economic reports are not consistently credible.  Nevertheless, the government's actions seem to be taking effect.  The question is whether this will be a hard or soft landing.  In Western experience, "soft" landings are rare.  Will the Chinese experience be different? 

Chinese GDP growth has been slowing for the last several quarters to 9.7% in Q1 to 9.5% in Q3, to an estimated 9% in Q3, and forecasted 8.4% in Q4.  Currently, the soft landing view is prevailing, especially after the release over the weekend of Chinese PMI (Purchasing Manager's Index) at 49.9.  The index has been stable for 3 months at approximately the same level even though a reading under 50 is thought to show contraction.

You also get different answers to the question of how dependent the Chinese economy is on exports v. local consumption.  I have heard various answers from credible economists.  the range is from 75/25 in favor of domestic consumption to 25/75.  It is a wide range.  I tend to favor the former from my readings.  Nevertheless 25% is still a major commitment to exports, and a slowdown in the Western economies would hurt.  Moreover, there are many Western companies manufacturing products in China for export to their home markets, including IBM, Dell, EMC, and CISCO.  I mention these because they were clients of my old company.  In 2008, these companies slashed manufacturing in China during the Great Recession. 

We are living in a funny world.  The world is becoming more dependent on one of the most opaque economies in the world; an economy whose currency is still not freely traded or floating.  to compound concerns, Chinese companies do not have the same credibility (as bad as it is) as Western companies in terms  of corporate disclosure policies.  Chinese economic growth has been impressive; and the rural to urban migration underpins continuing growth forecasts.  Nevertheless, I would still retain a dose of caution.