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Is China headed for a hard landing?

That’s what a lot of investors want to know. The Chinese stock market, after booming for so long, has pulled back. Indeed, from 1997 to 2007 the market grew five-fold, as the Chinese economy successfully brought some 2-300 million out of poverty. There were a lot of strains, however. The central bank imposed increased risk requirements on lenders, and they raised interest rates. Since April of last year the Shanghai index has fallen 30%, and it’s down over 60% from its high in ’07.

So is their economy headed for a recession? Small Chinese companies are facing a cash-crunch before their New Year holiday, and even consumer staples stocks have fallen. But it’s difficult to have a hard landing in the ocean. China is awash in liquidity. The authorities have over $3 trillion in foreign currency reserves, as trade surpluses have mounted up. Any time the authorities want to, they can flood their economy with cash.

This is part of the reason the Chinese government was able to act so decisively during the financial crisis, spending $500 billion, or 10% of its economy, in 2009. Some credit the Chinese stimulus with pulling the world out of recession that year. But nothing comes for free: that spending added to inflation, which the central bank had to fight. Now, with inflation waning, the bank is easing reserve requirements and cutting interest rates.

In spite of its recent weakness, the Chinese economy appears to be stabilizing. Let’s hope so. Because with slow growth in the US and Europe facing recession, a hard landing in the world’s second largest economy would shake us all.

Douglas R. Tengdin, CFA
Chief Investment Officer
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