Monday 11 July 2011 7:05 pm

China’s economy looks to be on shaky ground

INFLATION in China hasn’t been tamed. Statistics released at the weekend suggest annual inflation for June is running at 6.4 per cent, up from 5.5 per cent in May; while food inflation for June shot up 2.7 per cent on the month to 14.4 per cent. Tomorrow, China will release its GDP statistics, which are expected to show the economy is slowing. Based on the authorities’ hawkish stance on controlling interest rates – if not the money supply – expectations are for China to tighten further to prove that it is on top of rising prices. That means the principal hope for driving global economic recovery is in peril. Many economists and commentators have certainly turned more pessimistic on China. Although more bearish than most, professor Nouriel Roubini of Stern School of Business is not alone in believing: “Eventually, most likely after 2013, China will suffer a hard landing.” He thinks ultimately “no country can be productive enough to reinvest 50 per cent of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem.” And he is certainly not alone in thinking “China is rife with overinvestment in physical capital, infrastructure, and property.” However, the key problem for traders looking to position themselves based on fundamentals is that this requires them to trust the statistics coming their way. Michael Hewson of CMC Markets thinks China’s inflation could well be higher than the official statistics let on. While on GDP, professor Anthony J. Evans of ESCP Europe Business School says China is “the equivalent of studying Russia in the 1980s.” He has “little confidence that GDP figures are accurate, and even if they are, much of them could well be Keynesian style public work monstrosities.” It’s because of these potential “monstrosities” that it’s impossible for traders to ignore China. Legitimate questions abound about whether the growing money supply is causing the Chinese to build castles in the sky, with many pointing to an asset bubble in housing – unsurprisingly given its central role in recent credit booms and busts. The global economy will likely falter if China stalls. Hewson says China on its own cannot drag western economies out of their weak positions. And even if China manages its soft landing, we could be stuck between a rock and a hard place. Angus Campbell of London Capital Group notes “there’s a fear that the People’s Bank of China may raise rates so much that the prolific growth the whole globe is relying upon at the moment may be snuffed out.” Even though the statistics are deeply unreliable, much of the debate will continue to centre upon whether the authorities can perform a soft economic landing or are heading for a crash. History suggests that an economy as centrally planned as China’s is destined to suffer from massive malinvestment – which leaves the all-important question not “whether” the bubble will burst, but “when”.