Excerpted from Goldman Sachs interview with Michael Pettis,
Allison Nathan: Given how daunting some of these challenges seem to be, is China heading for a hard landing?
I think the soft landing/hard landing debate misrepresents the structure of Chinese growth.
China’s options are not a soft landing of 6-7% growth for the rest of the decade or a hard landing of growth below 5%.
The real choice is between either what I call a long landing, in which growth drops on average by roughly 100 to 150 bps per year, or a soft landing followed by a very hard landing.
The long landing scenario requires that the reforms be implemented reasonably quickly, because we may only have another three or four more years before we run out of debt capacity, but not disruptively. A long landing won’t be easy and it will require political skill at playing off the different interests, but it would be orderly. And while annual growth rates in this scenario wouldn’t average much above 3-4% during President Xi’s administration, rebalancing means household income growth would be higher, and so the decline in the income growth rate of ordinary Chinese wouldn’t be anywhere near the decline in overall GDP growth rate.
If, instead, we have what everyone would hail as a soft landing, with growth remaining above 6-7% for another two years, it would just mean that credit was still growing too quickly. And once we reach debt capacity constraints, the so-called soft landing would be followed by a very brutal hard landing.
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An oldie but a goodie...
Various commentators have pointed to China’s cement industry as one indicator of a property bubble, noting that China has produced and used more cement in the last few years than the United States did over the entire 20th century. Data from US and Chinese government sources compiled by the historian Vaclav Smil – and publicized by the blog of Bill Gates – show that China consumed 6.6 billion tons of cement in 2011-2013, vs. 4.5 billion tons consumed by the United States from 1901-2000.
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As Pettis concludes,
In China, it will be no different.
Growth miracles have always been the relatively easy part; it is the subsequent adjustment that has been the tough part.