China's economy looks strong, but its policy tools are crude and it's still too dependent on exports. A hard landing this year is likely.
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.
A hard landing in China is very likely for two reasons. For one, Beijing's policy tools are crude. In the wake of a real estate bubble, a jump in consumer inflation from negative territory in 2009 to 4.9 percent in January 2011, and a rise in food prices to a politically untenable 10.3 percent, China has slammed on the brakes. Eight times since January 2010, the central bank has raised reserve requirements – a sledgehammer tool the Federal Reserve here hasn't used in decades.