Countries covered: China
In this report we outline the likelihood and the consequences of China’s multi-decade investment boom coming to an abrupt end. With the global economy slowing and the housing market showing increasing signs of fragility, the clock is ticking on China’s stellar growth run.
Although we do not forecast an outright collapse, our forecast of sub-8.0% growth by 2012 puts us more in the hard landing than the soft landing camp. We believe the risks to our forecasts are tilted to the downside, with the probability of an outright recession runningat around 30%.
China’s housing market is exhibiting signs typically seen at the end of a bubble. The next phase of the cycle will likely see prices begin to fall as developers offload inventory. We estimate house prices need to fall by 30% nationwide before price excesses are unwound. Tangible evidence of Chinese malinvestment is starting to surface. After cautioning that the massive build-up of high-speed rail should be regarded as a red flag, the Macau casino boom, dependent upon cheap liquidity, could be the next sign of China’s bubble bursting.
As the repayment capacity of loans extended to local government investment vehicles comes under threat, we continue to expect instability in China’s banking system and a surge in non-performing loans.
In the event of a pronounced correction in investment spending, a slump in exports and potential banking sector instability, we find it highly unlikely that the Chinese consumer will be able to shoulder the burden of growth.
An economic slowdown will raise the likelihood of further protests. The major political risk to the economy comes from the ruling party seizing more economic power in response to perceived threats to its political interests.
While no country would be immune from a Chinese hard landing, we would argue that Australia is most precariously positioned. A Chinese hard landing would push the Australian economy over the edge, likely ushering in a recession and potentially triggering a financial crisis.
Regional asset markets do not appear priced for a sharp slowdown in China. H-financials (Chinese financial companies listed in Hong Kong) are set to underperform, while disinflationary forces will weigh on Australian risk assets and support bonds. Consensus expectations of continued yuan strength are not likely to be met.
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- Executive Summary
- TABLE: CHINA-ECONOMIC ACTIVITY
- Introduction
- Could 2012 Be The Year Of The Chinese Hard Landing?
- CHART: An Increasingly Inefficient Growth Story
- China - Investment, Output & Returns
- CHART: Diminishing Ret urns
- China - GDP Growth And Equity Market Returns
- CHART: The Great Wall Of Liquidity
- China - Money Supply (M2), CNYtrn
- CHART: Printing Presses Going Full Tilt
- US and China - Money Supply (M2), US$trn
- CHART: Investment Boom s Don ’t End Well
- Asia - Fixed Investment, pp contribution to real GDP growth
- CHART: Rebalancing Will Not Be Easy
- China - Real GDP Growth Forecasts, %
- CHART: Rail way Stocks In Free fall
- China - China Railway Group, CNY
- CHART: Banks Under Pressure
- China - 3-Month Shanghai Interbank Offered Rates (SHIBOR), %
- CHART: No Reform Here
- China - Index Of Economic Freedom
- Economic Activity
- Three Scenarios For Growth
- CHART: 7% Is The New 10%
- China - Real GDP Growth, % chg
- CHART: Service PMI Join s Manufacturing In The Doldrums
- China - HSBC Services Purchasing Managers’ Index
- CHART: China In A World Of Its Own
- Gross Fixed Capital Formation, Percentage Point Contribution To Growth
- CHART: Flying Too High
- Gross Fixed Capital Formation, % of GDP
- TABLE : Core Scenario
- CHINA-ECONOMIC ACTIVITY
- TABLE : Scenario 2
- TABLE : Scenario 3
- Real Estate Outlook
- Property Market: All The Hallmarks Of A Top
- TABLE : CHINA-MONETARY POLICY
- CHART: Expect A Sub-Zero Print
- China - Official House Price Index, % chg y-o-y
- CHART: A Worrying Combination
- China - M2 Money Supply Growth And CPI (% chg y-o-y)
- CHART: Cheap But Set To Go Cheaper
- China - Shanghai Composite Index
- Investment Outlook
- China Bubble: Case Study - The Rise & Fall Of High-Speed Rail
- CHART: High Speed Economy
- China’s High Speed Railways
- China Bubble: Case Study 2 - Luck Running Out For Macau Casinos
- CHART: Uncertainty Grows Over High Speed Spending
- China Railway Infrastructure Industry Value Forecasts
- CHART: Sign Of Things To Come ?
- China - China Railway Group, CNY
- CHART: The House Has Been Winning
- Macau - Gross Gaming Revenue, MOPmn
- CHART: World ’s Fastest Growing Economy
- Macau - Real GDP Growth, %
- CHART: Chine se Gamblers Punching Above Their Weight
- Macau - Average Tourist Spending Per Visit
- CHART: Turning Off The Tap s
- China - M2 Money Supply Growth, % chg y-o-y
- CHART: Another Run At The Lows
- MGM Resorts International Equity Price
- MGM China Equity Price
- CHART: Wynning Streak Over
- Wynn Macau Equity Price & RSI
- CHART: Triple Negative Divergence Warns Of Major Top
- Galaxy Entertainment Group Equity Price & RSI
- Banking Sector Outlook
- Banking Sector Instability Playbook
- TABLE : CHINA - BANKING SECTOR OVERVIEW
- Consumer Outlook
- Don’t Count On The Consumer
- TABLE : China -GDP BY EXPENDITUR E, % OF GDP
- CHART: Exports & Retail Sale s Correlated
- China — Retail Sales & Exports
- CHART: Consumers Confidence Not Immune To An Export Slowdown
- Consumer Confidence Indicator
- TABLE : CHINA-GDP CONTRIBUTION TO GR OWTH
- CHART: A Temporary Boost
- China - Passenger Car Sales, 000s
- CHART: Private Consumption Smaller Than Investment
- Nominal GDP of Selected Countries, US$trn
- Chinese Private Consumption, % Of GDP
- 10-Year Economic Outlook
- 7.0% Is The New 10.0%
- TABLE : CHINA Lon g-Term Macroeconomic Forecasts
- CHART: A More Subdued Growth Outlook
- China - Real GDP Growth, % chg
- CHART: Demo graphic Deterioration
- China - Estimated Population Trends
- Political Outlook
- Socio-Economic Risks On The Rise
- TABLE : Political Overvie w
- Global Implications: Case Studies
- If China Sneezes, Australia Catches Pneumonia
- CHART: Debt Interest Burden Un sustainable
- Australia - Debt Interest Payments, % of Disposible Income
- CHART: Exponential Boom s Often Lead To Busts
- Australian Iron Ore Exports To China, AUDmn
- CHART: Trade Surplus On Shaky Ground
- 4 Business Monitor International Ltd
- China 2012: From Miracle To Meltdown?
- Australia - Trade Surplus, US$mn
- CHART: Commodity Boom Fail s To Yield A Surplus
- Australia - Current Account, AUDmn
- How To Play A Sharp Slowdown In China
- CHART: Too Leveraged , Too Exposed
- Australia - Banking Statistics For ‘Big 4’
- CHART: A Sign Of Things To Come For House Price s
- China - Shanghai Property Index
- CHART: Financial s Have Further To Fall
- China - Shanghai Composite Index, Hang Seng Financials
- CHART: Don ’t Look Down
- Ratio - Hang Seng Financials/Shanghai Composite
- CHART: Still Bond s Over Stocks Lon g Term
- Australia - ASX200 Equity Index,10-Year Bond Index
- CHART: Debt Beat s Equity
- Ratio - 10-year Bond Index/ASX200
- CHART: Germany Bette r Placed
- German Dax Versus Australian ASX200
- CHART: Aussie Outperformance Won ’t Last
- Ratio-Dax/ASX200
- CHART: A Major Top
- Galaxy Entertainment Group Equity Price
- CHART: Negative Divergence
- Weekly RSI
- CHART: Wedged In
- China-CNY 12-Month NDF
- CHART: Suggesting Weakne ss
- Daily RSI
- Ratings Methodology
- Outline Of Ratings
- TABLE : BMI Risk ratings
- TABLE : Lon g Term Political Ratings
- TABLE : Lon g Term Economic Ratings
- TABLE : Short-Term Economic Ratings
- Global Assumptions
- Global Outlook
- TABLE: GLOBAL ASSU MPTIONS
- TABLE: GLOBAL & REGIONAL REAL GDP GR OWTH, % CHG Y-O-Y
- TABLE : DEVELOPED STATES REAL GDP GR OWTH FORECASTS, % CHG Y-O-Y
- TABLE : EMERG ING MARK ETS REAL GDP GR OWTH FORECASTS, % CHG Y-O-Y
- Title : China Macroeconomic Forecasts
- Title : Australia Macroeconomic Forecasts
- Title : Macau Macroeconomic Forecasts
- Title : World Macroeconomic Forecasts
- Title : Developed Market s Macroeconomic Forecasts
- Title : Emerging Market s Macroeconomic Forecasts
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