As nervousness gave way to panic and financial meltdown across the world last month, Chinese officials had every reason to remain cheerful amid the storm.
Sure, China’s economy will be hit by the global crisis, and a domestic cyclical slowdown is beginning to bite. But the chances of a painful bust remain slim and an economic breather might just be what the country needs.
China has avoided the financial contagion engulfing markets in much of the developed world because it remains relatively insulated from the cut and thrust of global finance. The nation’s capital account – at least officially – remains closed and the financial sector is domestically focused.
Although the People’s Bank of China had considerable holdings of toxic mortgage-backed securities, it was one of millions of investors bailed out by the US Federal Reserve. And big commercial lenders had only limited exposure to these bad debts because they are not yet sophisticated enough to be big players in global derivatives markets.
Concerns about the financial impact of China’s own property market are also overdone. The best estimate is that one-third of bank lending is property-related, with half of these loans in mortgages, which have so far proved rock-solid. Loans to developers look more risky – but with non-performing loans currently accounting for just 5% of total banking assets, balance sheet risk remains small.
Of far more serious concern to Beijing than the financial crisis is the knock-on impact of a severe recession in China’s big export markets. Officials endured an anxious wait for October’s post-crunch figures but they need not have fretted. Although the data reflected some pain being felt at the sharp end of manufacturing, China – as an exporter of low-cost goods – is in a good position to pick up market share during a slowdown.
Meanwhile, falling global commodity prices will slim down China’s import bill, which means the trade balance will continue to moderate rather than experience a sharp slump.
But the decisive fact in this debate is that China is not an export-led economy. During the last three years, net exports added an average of just 2.3 percentage points to economic growth compared to 9 points from domestic demand. Even if net exports go negative, economic growth is unlikely to drop below 8% next year. This is slower than the near 12% recorded last year, but still workable.
During the last two hard landings, in 1989 and 1998, the economy suffered a triple-whammy of a cyclical slowdown, an external shock and a severe structural problem. This time, however, there is no structural issue that can create the same level of damage inflicted by the two-track pricing system (1989) or the overhang of bad loans (1998).
Instead the country is heading for a soft landing. This will provide a welcome and much-needed opportunity for improved investment efficiency and industrial consolidation as bankrupt businesses are hoovered up by more effective players.
Yes, in practice this means factory closures and job losses in the light manufacturers and low-end export sectors, and the situation will get tougher as exports slow further. But rising wages show that the labor market is tight, meaning that consolidation can occur without driving unemployment to socially unacceptable levels.
Compared with the great restructuring of the state sector between 1995 and 2005, when 50 million workers lost their jobs, the current slowdown may prove comparatively painless.