Concern is growing that China’s economy could be headed for a hard landing. The Chinese stockmarket has fallen 20% over the past year, to levels last seen in 2009.Continued softness in recent data – frompurchasing managers’ sentiment and industrial output to retail sales andexports – has heightened the anxiety. Longthe global economy’s most powerful engine, China, many now fear, is running out of fuel.
These worries are overblown.Yes, China’seconomy has slowed. But the slowdown has been contained, and will likely remainso for the foreseeable future. The case for a soft landing remains solid.
The characteristics of a Chinese hard landing are wellknown from the Great Recession of 2008-2009. China’s annual GDP growthdecelerated sharply from its 14.8% peak in the second quarter of 2007 to 6.6%in the first quarter of 2009. Hit by a monstrousexternal demand shock that sent world trade tumblingby a record 10.5% in 2009, China’sexport-led growth quickly went from boom to bust.The rest of an unbalanced Chinese economy followed – especially the labormarket, which shed more than 20 million jobsin Guangdong Province alone.
This time, the descent has been far milder. From a peak of 11.9% in the first quarter of 2010, China’sannual GDP growth slowed to 7.6% in the second quarter of 2012 – only abouthalf the outsize 8.2-percentage-pointdeceleration experienced during the Great Recession.
Barring adisorderly breakup of the eurozone, which seems unlikely, the InternationalMonetary Fund’s baseline forecast of 4% annual growth in world trade for 2012seems reasonable. That would be subparrelative to the 6.4% growth trend from 1994 to 2011, but nowhere near thecollapse recorded during 2008-2009. With the Chinese economy far lessthreatened by export-led weakening than it was three and a half years ago, ahard landing is unlikely.
To be sure, the economy faces other headwinds, especially from the policy-induced cooling of an overheated housing market. But construction ofso-called social housing for lower-income families, reinforced by recentinvestment announcements in key metropolitan areas such as Tianjin,Chongqing, and Changsha,as well as in Guizhou and Guangdong Provinces,should more than offset the decline. Moreover, unlike the bank-fundedinitiatives of 3-4 years ago, which led to a worrisome overhangof local-government debt, the central government seems likely to play a muchgreater role in financing the current round of projects.
Reports of ghost cities, bridges to nowhere, and empty newairports are fueling concern among Western analysts that an unbalanced Chineseeconomy cannot rebound as it did in thesecond half of 2009. With fixed investment nearing the unprecedented thresholdof 50% of GDP, they fear that another investment-led fiscal stimulus will only hasten the inevitable China-collapse scenario.
But the pessimists’ hypeoverlooks one of the most important drivers of China’s modernization: the greatesturbanization story the world has ever seen.In 2011, the urban share of the Chinese population surpassed 50% for the firsttime, reaching 51.3%, compared to less than 20% in 1980. Moreover, according toOECD projections, China’salready burgeoning urban population shouldexpand by more than 300 million by 2030 – an incrementalmost equal to the current population of the United States. With rural-to-urbanmigration averaging 15 to 20 million people per year, today’s so-called ghostcities quickly become tomorrow’s thriving metropolitan areas.
Shanghai Pudong is the classic example of how an “empty”urban construction project in the late 1990’squickly became a fully occupied urban center, with a population today ofroughly 5.5 million. A McKinsey study estimates that by 2025 China will havemore than 220 cities with populations in excess of one million, versus 125 in 2010, and that 23 mega-citieswill have a population of at least five million.
China cannot afford to wait to build its new cities. Instead, investmentand construction must be aligned with thefuture influx of urban dwellers. The “ghost city” critiquemisses this point entirely.
All of this is part of China’s grandplan. The producer model, which worked brilliantly for 30 years, cannottake Chinato the promised land of prosperity. The Chinese leadership has long known this,as Premier Wen Jiabao signaled with his famous 2007 “Four ‘Uns’” critique –warning of an “unstable, unbalanced, uncoordinated, and ultimately unsustainable”economy.
Two external shocks – first from the US, and now from Europe– have transformed the Four Uns into an action plan. Overly dependent onexternal demand from crisis-battered developed economies, China has adopted thepro-consumption 12th Five-Year Plan, which lays outa powerful rebalancing strategy that should drive development for decades.
The investment and construction requirements of large-scaleurbanization are a key pillar of this strategy. Urban per capita incomeis more than triple the average in rural areas. As long as urbanization iscoupled with job creation – a strategy underscoredby China’sconcomitant push into services-leddevelopment – labor income and consumer purchasing power will benefit.
Contrary to the China doubters, urbanization is notphony growth. It is an essential ingredientof the “next China,” for itprovides Chinawith both cyclical and structural options. When faced with a shortfall of demand – whether owing to an externalshock or to an internal adjustment, such as the housing-market correction – Chinacan tweak its urbanization-led investmentrequirements accordingly. With a large reservoirof surplus savings and a budget deficit of less than 2% of GDP, it has thewherewithal to fund such efforts. There is also ample scope for monetaryeasing; unlike central banks in the West, the People’s Bank of China has plentyof ammunition in reserve.
A growth slowdown is hardly shocking for an export-ledeconomy. But Chinais in much better shape than the rest of the world. A powerful rebalancingstrategy offers the structural and cyclical support that will allow it to avoida hard landing.