Is China Headed for a Hard Landing?

The news from China in recent weeks has been dire. Strikes and protests — some of them violent and involving as many as ten thousand people — are reported almost daily. Millions of workers are being thrown out of their jobs, and economic indicators seem to presage more gloom, with electricity production for industry falling 4% in October, the first time it has declined in a decade. Even the country's seemingly insatiable thirst for oil to fuel its decades' long boom seems to be fading: China's national oil company said late in November that demand had declined "sharply" in recent months as industrial production slowed and was set to fall further.

So is China — the "fragile superpower" as one historian memorably called it — about to experience the one thing its leaders and many analysts and academics outside the country have feared for years: a violent contraction in its economy that some fear could spark widespread social unrest among its billion inhabitants? (See pictures of the global financial crisis.)

Some respected voices certainly think so. Nouriel Roubini, a professor at the Stern Business School at New York University, has warned for years of the dangers of a coming financial implosion. "The risk of a hard landing in China is sharply rising," he wrote recently. "A deceleration in the Chinese growth rate to 7% in 2009 — just a notch above a 6% "hard landing" — is highly likely, and an even worse outcome cannot be ruled out at this point." But other analysts, many of whom are China specialists, believe that a range of factors unique to the nation will not only likely preserve it from the worst of the global meltdown but keep its economy chugging along at a respectable 8% GDP growth in 2009.

Who's right? This is after all, not a trivial question. With the U.S., Japan and Europe all heading simultaneously into recession, China stands alone as one of the pillars of the world economy that might at least carry itself through the turmoil, and perhaps even bring along parts of Asia on its coattails.

For my money, I'd go with the homegrown economists, who make their calculations taking into account some of China's peculiarities that aren't necessarily amenable to accurate quantification. This group is in broad agreement that while things will be pretty ugly over the next several months, the nearly $600 billion fiscal package announced by Beijing in mid-November, along with a host of other measures, will keep the Chinese economy's head well above water. As Beijing-based economist Arthur Kroeber points out, the same factors that driven China's extraordinary growth will provide a base of GDP growth that could amount to as much as 6 or 7% a year. "People who don't follow China on a regular basis can miss some of the underlying drivers," says Kroeber, who runs the consulting firm Dragonomics. First, Kroeber says, there's a large demographic dividend provided by the fact that the average worker now has roughly half the number of dependents to care for they did in 1976, freeing up much more disposable income. Then you have the boost of adopting new technology more or less for free from overseas companies, a phenomenon development economists cal "technology catch up." And lastly, he says, there's urbanization. Some 15 million people are currently moving to Chinese cities every year, giving the economy an enormous boost from the investment in infrastructure like roads, bridges, and hospitals.

A recent estimate by Merrill Lynch also expects a 3% point addition to growth next year. In other economies today, that kind of growth would be unachievable. Whatever stimulus package finally gets put in place in the U.S., for example, is unlikely to add even one percentage point fillip to growth. But China, as it has proved repeatedly over recent decades, is different. It remains a unique mixture of raging, visible capitalism resting on a foundation of state-owned enterprises, which, the Merrill report points out, still account for 33% of industrial production and 45% of investment in China's cities. Beijing also still holds sway over its domestic banking sector, particularly in times of crisis that threaten the Party's power. "On the outside, China's banks do look a lot more like normal Western commercial banks," says one investment bank analyst with a decade of experience in China. "But every single senior officer — right down to the manager of the smallest branch in Outer Mongolia — is a Party member. And when the Party says, 'Jump,' or 'We're all in trouble,' they say, 'How high?' It's that simple." The same rule applies to state owned enterprises, which still account for about a third of GDP.

The ability of the government to engineer major changes in the economy is particularly important today, considering many of the problems China faces were directly created by Beijing. Deeply concerned about an economy growing at a blistering 11% or more per year and a spiking inflation rate, the state set out to cool things down last year. That meant introducing new, tougher labor laws and other measures designed to shut down lower value-added production of goods like toys and garments, precisely the area where now, months later, hundreds of thousands of migrant workers are losing jobs. In the early 2008 bubbling property market, authorities conveyed to potential house buyers that they would be wise to hold off. "The government basically said, 'You'd be a complete idiot to buy an apartment right now because we're going to make sure that prices drop like a stone,'" says the investment bank analyst. "Now the government is telling them it's not just okay to buy, it would be a great time to buy and the banks will be happy to lend to you. Of course people will start buying again." In other words, having deliberately caused much of the problem in the first place with an eye to restructuring the country's economy, Beijing should be able to reverse much of what it put in place relatively quickly and easily. (See pictures of China on the wild side.)

This Dec. 18 will mark the thirtieth anniversary of the moment when Deng Xiaoping pushed a Communist Party plenum into adopting the first measures that would launch the country into the most extraordinary burst of economic development the world has ever seen. Outsiders have been predicting that it couldn't last ever since. The financial and economic crisis currently plaguing the globe has lead the whole world into unchartered territory. If the likes of Kroeber and Rothman are right, the one thing that could remain constant in a world where nothing seems fixed is China's ability to surprise us once again.

See pictures of Sichuan, China, six months after the May 2008 earthquake devastated the region.