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Worry, no hard landing for China

04/13/2012 @ 10:06am

The market has enough to worry about these days without getting the future of China tossed onto the pile. But despite the rumor that burned through the market yesterday, China's GDP came in below expectations, giving traders one more reason to reach for the Advil. That exports were cited as one reason for the slowdown has to be a special concern for outside observers.

China occupies a curious space in the global economy, and it's growth needs to be seen in that context. China's still mainly an exporter, not a consumer, nation. So a slowdown there is more a reflection of the global economy than a driver of it, as opposed to, say, a slowdown in the U.S.

Still, make no mistake, China matters. With companies as diverse as Yum Brands, Wal-Mart and Caterpillar expanding in the Middle Kingdom, every aspect of China's economy is important.

China's exports are "dead in the water," said Robert Hardy, principal at consultancy GeoStrat, who also writes the firm's WorldView newsletter. He sees "a little bit" of export growth, but not enough to support China's growth, "and that's a problem for them."

There's a lot of talk about China's switch to a consumer-led economy, but Hardy doesn't see it. "It's a false hope," he said. Consumer spending as a percentage of GDP is actually decreasing, he said. "They're still in love with the export model."

That said, he doesn't see a hard landing, for the simple reason that the government will push more money into the economy to blunt the slowdown (which is what the market's guessing as well.) But that creates an "unbalanced economy," he said. "It's not efficient."

The team of China watchers at WestPac, who write under the nom de plume Phat Dragon, also see a slowdown, but not a horrid one. While the market was busy plugging that 9% growth rate, Phat Dragon pegged GDP at 8.2%, just a hair off the actual 8.1%. So they're a pretty good outside observer.

"The slowdown in real GDP is significantly milder than that observed across a broad range of other indicators of activity, but a volume deceleration of 1.8ppt over a year is certainly not a trivial one."

The firm says that broadly, activity across most sectors in China is expanding at single-digit rates, which happened in the third-quarter of 2008 and during parts of the Asian Crisis, but only then. "While one can certainly argue that the slowdown is not deep, it is certainly broad."

The firm expects a "soft landing" in which the economy expands at just about its long-term growth rates, and said the GDP number didn't do anything to change their view. "Smooth sailing," they said.

Smooth sailing within the framework of a slowdown, of course.

-For continuously updated news from The Wall Street Journal, see WSJ.com at http://wsj.com.

(END) Dow Jones Newswires

April 13, 2012 09:53 ET (13:53 GMT)

DJ WSJ BLOG/MarketBeat: No Hard Landing for China, but Plenty of Worry->copyright

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