China Set for Goldilocks Landing?
Image Credit: Flickr / Peter

China Set for Goldilocks Landing?

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In the Chinese Zodiac, China is now entering the Year of the Water Dragon, marking a year of transition, uncertainty and change.

The Year of the Dragon is indeed set to be a critical year for political change in China – at the very highest levels of the national government. This autumn, the 18th National Congress of the Communist Party will elect the new Central Committee and Politburo Standing Committee members.

Current President Hu Jintao and Premier Wen Jiabao are due to step down from the Standing Committee to make way for the new generation of leaders, from amongst whom the new Chinese president and premier will be appointed in March 2013.

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In the Year of the Dragon, China – which is now the world's second largest economy – is also facing considerable economic uncertainty. There’s clear evidence that Chinese economic growth momentum has moderated during the second half of 2011. The eurozone, still a major market for Chinese exports, is already sliding into recession, while the momentum of U.S. economic recovery, although encouraging in recent months, remains moderate at best.

Latest GDP growth data released for Q4 2011 showed that Chinese GDP growth had moderated to a pace of 8.9 percent year-on-year, the slowest in ten quarters. This reflects various factors, including weakening EU demand for Chinese exports, as well as the impact of significantly tighter monetary policy in order to curb inflation pressures.

There are signs that the Chinese government’s monetary policy tightening in 2011 has been successful in curbing inflation, with the year-on-year CPI inflation rate slowing from 6.5 percent in July 2011 to 4.1 percent by December.

However, the recent growth slowdown has heightened concerns about whether the Chinese government can successfully engineer a Goldilocks scenario – a “not too hot, not too cold” – of moderate inflation and a soft landing for the economy, or if China will face a hard landing with growth slowing sharply.

IHS Global Insight's central case forecast for the Chinese economy in 2012 is for a soft landing, with GDP growth moderating from 9.2 percent in 2011 to 7.9 percent in 2012. This forecast is based on the central case scenario for the world economy, which assumes the eurozone will only have a mild recession in 2012, with eurozone GDP declining by 0.7 percent, while the United States is forecast to have positive growth of +2.0 percent.

A number of factors are expected to support the resilience of Chinese economic growth in 2012.

First, although Chinese exports to the EU are clearly slowing rapidly, overall Chinese export growth is still positive. In December 2011, Chinese exports were up 13.4 percent on a year ago, despite weaker EU orders, since the U.S. market has remained stable while exports to the rest of Asia and other emerging markets has continued to grow strongly.

Second, domestic demand measures still show considerable momentum, with December industrial production up 12.8 percent on a year ago, while nominal retail sales were up 18.1 percent on a year earlier.

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