Why A Soft-Landing Is Bad For China

Tyler Durden's picture

Counter-cyclical measures cannot solve structural problems. If the market is counting on monetary easing or fiscal stimulus to lift the Chinese economy out of the current slump, we believe they will be disappointed (as we have discussed a number of times recently). Without major structural reforms, we believe, like Credit Suisse, that China will be growing around 7-8% in the coming years, rather than the coming quarters.



Via Credit Suisse: China, The New Norm For Growth

The core problem is the sudden disappearance of investment interest from the private sector. Local governments and the NDRC have announced significant infrastructure investment plans. However, we think that their funding remains unresolved and that government-funded infrastructure investment is not a substitute for private investments in the long run.

Anything but short-term funding is not being borrowed currently...


On the structural front, we believe China needs to open its service sector to private capital, cut corporate tax and break the monopolies in the banking and utility sectors. Unlike much of the manufacturing sector, many parts of the service sector, such as healthcare, education, environmental protection and asset management, are profitable and have room for efficiency gains.


The market, it would appear, is factoring in a global growth slowdown (which will be quickly recovered from thanks to Central Bank largesse). As Credit Suisse notes, though, in the case of China as a growth engine via stimulus, the market is not quite prepared for a prolonged slowdown and its repercussions on corporate cash flows. To us, what ultimately matters is not how far economic growth will fall, but how long it will fall. Credit Suisse's base case scenario is that consumption can prevent the economy from a hard landing. Yet, any strong rebound is unlikely without the re-engagement of private investment. GDP growth has been stuck in a range of 7-8.5%, in our view.

To economists, this is good news because it represents a soft landing. From a corporate perspective, this is unfavorable news as the debt accumulated during the boom time may start to have negative repercussions. Merely two years ago, in a negative real interest rate environment, excessive borrowing was good as bank credit was ‘free money’ to take home. Companies in China also have a tradition of doing cross-guarantees. But when the business environment deteriorates, pricing power diminishes and account receivables surge, the debt chain tends to break down at the weakest link. Anecdotally, account receivables appear to be rising quickly.

For global commodity and machinery producers, this would mean that demand from China will not rebound soon. In fact, there may be more risk on the downside than the upside. Furthermore, as the economy becomes more dependent on consumption instead of housing and infrastructure investments, the propensity for capital goods usage is likely to decline. When capital intensive industries are consolidating, power demand may decline more than GDP growth would imply.


A key question now is whether the leaders in Beijing will be willing to bite the bullet and undertake more structural reforms. We do see some signs of willingness, in areas like the social safety net, subsidized housing and interest rate deregulation, but these tend to be less controversial than others. Whether a breakthrough can be executed still remains to be seen. We suspect there could be a strong preference for gradualism, at least.

Traditionally, China has bitten the bullet when its economy has been cornered, which was the case for both relaunching the special economic zones and joining the WTO. The most likely catalyst to force the government’s hand, in our view, would be a plunge in the property sector. This scenario is unlikely to happen in the coming six months, but is more likely in the next six years, in our view. Until the structural issues have been addressed, we expect mediocre growth to be the new norm in China.


Bottom Line - It's The Cash-Glow Stupid and a soft-landing does not provide the cover for the exponential credit extension that occurred in the past to be contonued. Combined with lower FAI, there is not much hope for a 'rebound' in Chinese growth, and there is pain to come for the over-levered as govt funding is not is not in a hurry to be deployed... they need major structural reform (and that involves COST!).

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Silver Bug's picture

Debt have negative reprucussions!! Who would of guessed? :P



LawsofPhysics's picture

I know many who do business with China, even have things manfactured there, but asking the same people to trust a centrally-planned, state-run, communist financial sector to safely hold their wealth is another thing altogether.  Good luck with that.  China will get the reserve currency when they are transparent, could be a while.

Yen Cross's picture

China is overbuilt. They can repave all their roads thrice over, and it still won't change the fact that the PBoC is into [ SPEC] investment!

  A country of 1.4 billion people, with empty cities, says it all!

laomei's picture

Have you ever actually been to China? I'll give you the benefit of the doubt and say you have.  Have you ever been outside the core of Shanghai/Beijing?  There is tons more to do

DUNTHAT's picture

yes, if they can afford it.

but at $2 per hour, there isn't a hell of a lot of goodies you can afford

1 Billion impoverished peasants

300 million well to do chuppies..

The only way they can maintain their mercantilistic style is to keep the yuan pegged to the dollar, and the only way they can do that is pay most of their workers $2 per hour

Caught between a rock and a revolution.

laomei's picture

In the first tier cities, sure.  In the rest of the country... pretty much everything is incredibly cheap.  And that $2 an hour you are griping about, there's a whole lot more that gets added into that.  No one works that without the overtime.  The only people who work that are getting free room and board as well.  No taxes on that money for the most part either.  There are expectations of yearly bonuses which account for multiple months worth of pay which are not included.  


Is this enough to live in the city? Nope, you'll never be buying a house with that money, unless you have a local hukou and get approved for the low-income housing projects, in which case, yes, you WILL get your own place.  Migrant worker? Might not seem like a huge pile of money to someone in the city, but taking a haul back home that's put you into the upper-class of the village is a big deal.  Subway systems are priced to be a token amount, ditto with the buses.  Gas can jump to $10 a gallon and China's not really impacted on the whole, as the vast majority of the farmland here is not automated.  Nor do the vast vast majority really have any reliance on gas for their commute.  Once you take those factors out of the equation, it's not such a big deal anymore.

DUNTHAT's picture

MASSIVELY oversupplied on everything structural...


No Euros please we're British's picture

Nah, they just need to embrace Keynesian economics, hire Goldman Sachs as consultants and all their problems are solved. 

disabledvet's picture

I would argue China is in fact disintegrating. I would expect negative 10 percent "growth" going forward...and the collapse of the Shanghai exchange bears this thesis out. Of course it hasn't mattered at all to the US market. "Just cheaper money" (good for exports) "and cheaper credit" (good for internal demand.)

BanjoDoug's picture

I would sure agree with D-Vet....  more and more of these ZH articles seem like MSM propoganda, what happened to the old ZH ?   .... has it gone PC/MSM-compliant, like Drudge ?

Let them eat iPads's picture

No doubt, these forcasts of 7-8% growth going forward are lunacy.

They'll be lucky to get 0-3%.

Dr. Engali's picture

Where can I get me some of this glowing cash? Fukushima?

Piranhanoia's picture

China has a food fight on its hands that it can't win.  

ATG's picture

China +1.45%.

Bot to open long SPY Calls:



Mike in GA's picture

Bottom Line - It's The Cash-Glow Stupid and a soft-landing does not provide the cover for the exponential credit extension that occurred in the past to be contonued. Combined with lower FAI, there is not much hope for a 'rebound' in Chinese growth, and there is pain to come for the over-levered as govt funding is not is not in a hurry to be deployed... they need major structural reform (and that involves COST!).

What does FAI stand for in this last paragraph?


youareabsolutelyright's picture

My Dachshund says it means Fixed Asset Investment ???

cwwang's picture

China is caught between a labor revolution and growth needs.  The cost advantage is diminishing as inflation hit this motherland while it needs export to sustain its growth.  Can't build its way out of managing 1B people in that country.  Harder to get that many people's standard of living up for domestic consumption than anything else.