Analyst: China risks ‘hard landing’ on excess investment
China faces the risk of a “hard landing” after 2013 as efforts to boost growth through investment lead to excess capacity, said Nouriel Roubini, the New York University professor who predicted the financial crisis.
“China is now relying increasingly not just on net exports but on fixed investment” which has climbed to about 50 percent of gross domestic product, Roubini said in Singapore yesterday. “Down the line, you are going to have two problems: a massive non-performing loan problem in the banking system and a massive amount of overcapacity is going to lead to a hard landing.”
The nation faces a 60 percent chance of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices, according to Fitch Ratings. A record $2.7 trillion of loans extended over two years has pushed property prices in China to all-time highs even as authorities set price ceilings, demanded higher deposits and limited second-home purchases.
China’s current challenge is to maintain growth and curb price gains ahead of a leadership change next year, Roubini said. Officials may use administrative steps and price controls as well as raising rates further and allowing currency appreciation if inflation becomes a bigger problem, he said.
The benchmark Shanghai Composite Index declined 0.8 percent this week and has fallen 3.7 percent in 2011 partly on concern tighter monetary policy risks slower growth. China may imminently order lenders to set aside more cash as reserves to drain money from the economy, Australia & New Zealand Banking Group Ltd. said June 10.
‘Delicate’ transition
“The policy challenge through next year, where you have a delicate political transition of the leadership, is to maintain growth in the 8 to 9 percent range while pushing inflation below what it is right now,” said Roubini, the co-founder and chairman of New York-based Roubini Global Economics LLC.
After next year, the bigger challenge is “to reduce fixed investment and savings and increase consumption. Otherwise after 2013, there will be a hard landing,” he said.
Fixed-asset investment expanded 25.4 percent in the first four months of 2011 compared with the same period a year earlier. The nation reported a $13.1 billion trade surplus for May, with surging imports indicating the nation’s demand may support global growth for now while adding pressure for higher interest rates.
China can sustain economic growth of about 9.5 percent this year and next even as the government cools the real-estate market and reins in bank lending, the International Monetary Fund said June 9. Consumer prices rose 5.3 percent from a year earlier in April, exceeding the full-year target for a fourth straight month.
Rate increases
The fastest-growing major economy has raised rates four times since mid-October. Reserve requirements for the biggest banks stand at a record 21 percent, while the one-year lending rate is at 6.31 percent.
Global growth may remain weak in the second half of the year and oil prices may surge about 50 percent if Middle East tension worsens, Roubini said in the speech at the OCBC Securities Global Investors Forum in Singapore yesterday.
Higher energy costs, data suggesting easing expansion in the U.S., Europe’s lingering debt crisis and the recession in Japan have eroded investor confidence, with the MSCI AC World Index tumbling 4.7 percent this month.
There is increasing evidence of a potentially “excessive” slowdown in the world economy and crude prices may climb to as much as $150 per barrel if unrest in major oil-producing nations intensifies, Roubini said. A third round of so-called quantitative easing by the Federal Reserve to boost growth remains unlikely unless the U.S. economy stalls, he said.