Experts clash over China prospects

Two leading economic consultancies are divided on whether a “hard landing” is likely for the Chinese economy in 2006-7. In a debate last week, Lombard Street Research argued that such a slow-down is imminent, while Capital Economics maintained that it is not.

Both sides took a hard landing to mean a substantial slowdown from the trend nominal GDP growth rate of about 11%. But Lombard argued the process is already under way, while Capital Economics disagreed.

Diana Choyleva, a director of Lombard Street Research, said the cycle of Chinese economic expansion peaked in mid-2004. By last year, a hard landing in domestic consumption was already apparent. Buoyant exports are sustaining total output growth but this could soon be threatened by a slowdown in American consumer spending.

Choyleva argued that the reaction of the Chinese authorities is likely to make any slowdown worse. In her view, the bureaucratic response of the authorities is likely to stimulate overinvestment and overheating.

Reforms already announced by the Chinese authorities, such as the desire to promote a “socialist countryside”, will backfire, in her view. “Private sector growth will stifle the basis of Chinese economic success,” she said.

Charles Dumas, another Lombard director, reinforced Choyleva’s argument by suggesting that an American consumer slowdown later in 2006 is likely to hurt China. There is also an added risk of a growth of American protectionism.

However, Roger Bootle, managing director of Capital Economics, argued that a hard landing is not likely in the near future. “China’s recent growth rate is not a flash in the pan,” he said. “It has continued from the late 1970s.”

He acknowledged that China has problems but maintained it is in a good position to deal with them. It has low inflation, a current account surplus and is not highly dependent on exports.

Julian Jessop, chief international economist at Capital Economics, said that China has substantial scope to rebalance its investment. Although the financial system has problems, “it is healthier than it was a few years ago,” he said. In addition, he said that with the Beijing Olympics in 2008, the Chinese authorities would not allow a hard landing beforehand.