China and hard landing

​On Thursday, I had the opportunity to attend a seminar by Prof. Danny Quah of LSE. His credentials are impressive. Check him out here.

The talk was tantalisingly titled, ‘China: why a crash is imminent… and why it is not going to happen anytime soon’.

It was held at LKY School of Public Policy in Singapore.

He called the case for a hard landing for the Chinese economy the prosecution case. In the ‘spirit of objectivity’, he proceeded to present that case first. Then, he presented his case which is that the prosecution case is massively overblown.

If his arguments are the ones against China hard landing, then the world msut be worried. He made no case.

His points were that:

(1) A stock market is no barometer of the China economy.

(IF so, why did the government go to ridiculous extent to prevent the stock market from declining).

(2) Service sector doing far better and rebalancing happening. Evidence: Services sector PMI. He needs to have a dialogue with Chris Balding.

(3) Rural  ==> Urban migration would take care of the housing inventory.

He had nothing to say on the continuous profit decline, the massive rise in debt/GDP ratio since 2008 (it still keeps rising). Now, I came across this chart too:

​​​Source: https://twitter.com/EMgist/status/711816061235015681​

​I also took issues with the stale quote from Prof. Samuelson on how the stock market predicted nine out of the last five recessions. Professor Quah cited that to make the case that the Chinese stock market crash did not mean anything for the Chinese economy.

He had said it in 1962 and, hence, his sample period must have included or consisted largely of the post-war​ recovery period when stock market declines were not followed by an economic recession. That is somewhat unsurprising.

But, more than five decades later, the stock markets do not predict anything or have nothing to do with the real economy at all. Period.

The case for an economic hard landing in China does not stem from its stock market crash of 2015. That was but one of the several symptoms. It is not the important one.

Further, in addition to all the economic and financial market signals and noise, clearly, beneath the surface political rumblings can be felt and perceived by many. See here and here.

Matthew Johnson has a very thoughtful blog post that I would strongly recommend reading.

Given all these, a facile case for China economy soft landing does no justice to the topic nor to the learned Professor’s scholarship.

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