CHINA’S SLOWDOWN

HARD LANDING FOR CHINA VERY UNLIKELY

Liao Qun

China Daily, June 30, 2011

Concerns about a hard landing in China's economy have arisen recently, weighing on sentiment in the Hong Kong stock market.

Professor Noureil Roubini of New York University made just such a blatant prediction on June 11, citing the accumulation of non-performing loans and serious overcapacity on the mainland.

Meanwhile, investment guru George Soros argued that China has lost the opportunity to contain inflation and faces the risk of an economic hard landing.

Are such concerns justified?

Indeed, economic growth in China has slowed down this year, with GDP growing by 9.7 percent (all percentages in a year-on-year basis unless indicated otherwise) in the first quarter, 0.5 percent and 0.1 percent lower than that of 2010 and the fourth quarter of 2010, respectively. Furthermore, growth in value-added industrial production moderated to 13.4 percent in April and 13.3 percent in May from the first quarter's 14.4 percent, indicating a further slowdown in economic growth in the second quarter.

However, this is what was intended and expected by the central government with its monetary tightening policy. The economy recovered strongly with 9.1 percent growth in 2009, and extended the rally by 10.3 percent in 2010, pushing up inflation and raising concerns about overheating again. Against this backdrop, the central government raised the curtain for a new round of monetary tightening by hiking interest rates in mid-October 2010. Since then there have been four interest rates hikes with the one-year lending rate increased from 5.25 percent to 6.25 percent, and nine reserve requirement ratio (RRR) rises with the RRR for large-sized banks up from 17.0 percent to 21.5 percent and for small to medium-sized banks raised from 13.5 percent to 18.0 percent. Meanwhile, the People's Bank of China (PBoC) performed open market operations in the money market and conducted the so-called window guidance to commercial banks frequently. The economic slowdown is thus a direct result of such monetary tightening, and represents a healthy economic adjustment for both the government and the market.

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