by Mo Ji, AllianceBernstein
Shamaila Khan: Mo, what is your assessment of the risk of [a] hard landing in China? With the incredible increase in debt and leverage in China, you know, everyone’s always concerned that growth is going to fall off a cliff, and obviously it has important implications for all global markets. How do you think it should play out, and what are the things that we should be watching?
Mo Ji: In the past 10 years, this is a key question. Investors always worry, and China’s hard landing hasn’t been the case. Then, in our view, we think global economy is kidnapped by the Chinese property sector. Why? If we have the Chinese property sector hard landing, we’ll have the Chinese credit bubble burst. When we have the Chinese credit bubble hard landing, we have the China hard landing. China hard landing, global hard landing.
The most important thing for us to judge for China’s hard landing, we think, it has six criteria. A combination of these six criteria will finally lead us to [a] China hard landing.
Number one, certainly, it has to be the property bubble burst. Number two, it has to be the credit bubble burst. And number three, if we see a period of persistent high real interest rate.
And number four, it’s about unemployment rising rapidly. Number five, a faster pace of capital account liberalization—that means the economy is much more vulnerable. And number six, a rising probability of policy mistakes or policy failures.
- Policy is tightening—no bubble.
- Credit—they are doing the deleveraging; it is fine.
- The real interest rate is coming down—so [the] unemployment rate at 5%, very stable.
- Capital account—we already have a capital control.
- And for the last one, we see the policy right now is on the very right track.
So far, we didn’t see [that] China is close to [a] hard landing. But in the longer term, we will closely monitor when the property bubble is going to burst.
We think the key indicator to follow is the Chinese land price. Whenever we see [that] the Chinese land price is higher than the potential rate of return for developers, that’s the time we’re close to a property bubble burst. Then, we see a chain of hard landing—in credit, in China’s economy and also in [the] global economy.
Shamaila Khan: Thank you, Mo; very important risk to monitor for all global markets.
This post originally appeared at the AllianceBernstein Context Blog
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