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Watch out for a hard landing in China

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(Read caption) A labourer swings a sledgehammer to smash concrete for usable bricks at a demolition site to make way for a residential area in Xiangyang, Hubei province. March 6, 2011. Although China looks strong, its economy could see a hard landing this year because of internal weaknesses.

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When someone expresses awe and admiration for China's economic miracle, I'm reminded of Japan in the late 1980s. Back then, many Americans believed they'd soon be run out of business by Japanese firms or end up working for them.

Instead, Japan's stock and real estate bubbles collapsed. Japan entered a deflationary depression that continues today and keeps it stuck as a perpetual also-ran, no longer a threat to America's economic primacy.

Despite all the hype, today's Chinese threat is even more remote. In 2010, China's gross domestic product – its output of goods and services – was $5.9 trillion, just 40 percent of the United States' $14.7 trillion GDP. It's true that the Chinese economy is growing rapidly, but it needs consistently high growth rates just to absorb all the people moving to the cities in search of jobs.

And with US consumers retrenching, China's export-led economy is due for a hard landing. Instead of 9.8 percent, its growth in the fourth quarter of 2010, China's GDP could decline toward a recessionary 6 percent. That will slow domestic job growth, choke off the expansion in the rest of Asia, and rattle investors around the world.


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