– We attach a one-in-three probability to China experiencing a hard economic landing commencing before the end of 2014;
– We define “hard landing” as an abrupt slowdown in real GDP growth to an average of 5% y-o-y or less over four consecutive quarters (the analogy is that a 5% GDP growth in China equals to a -3% in US and -5% in Europe);
– In the report, we discuss six key reasons why the risk of a China hard landing happening in the next three years appears to have increased (1. Over-investment and excessive credit; 2. Rudimentary money architecture; 3. Privileged state-owned enterprises; 4. Unintended consequences of financial liberation; 5. Lewis turning point; 6. The setting in of growing pains);
– Our analysis use Nomura’s China Stress Index (CSI), which uses 18 indicators to summarize the macro risks in a single measure.
The report has an in-depth analysis on the impact of a China hard landing on emerging economies (mainly Asia and Australia). Here is their call for Australia, for which we should add Brazil (after all, they are both commodity economies):
“The sensitivity of the Australian (Brazilian?) equity market to a hard landing in China and a substantial fall in commodity prices would be dramatic, not withstanding the fall in the equity market we have already seen this year. Such a scenario, should it eventuate, could see Australian (Brazilian?) GDP growth drop back to around 0.5%, assuming a vigorous policy response and a coincident weakening in the A$ (BR$?), which there would inevitably be.”
Full report can be downloaded below. 471542