China faced the risk of a “hard landing” after 2013 as efforts to boost growth through investment led to excess capacity, said Nouriel Roubini, the New York University professor who predicted the financial crisis.
“China is now relying increasingly not just on net exports but on fixed investment” which had climbed to 50 per cent of gross domestic product, Roubini said here yesterday. “Down the line, you are going to have two problems: A massive non-performing loan problem in the banking system and a massive amount of overcapacity is going to lead to a hard landing.”
The nation faces a 60 per cent chance of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices, according to Fitch Ratings. Loans worth $2.7 trillion were extended over two years, pushing property prices in China to all-time highs even as authorities set price ceilings, demanded higher deposits and limited second-home purchases.
China’s current challenge was to maintain growth and curb price gains ahead of a leadership change next year, Roubini said. Officials might use administrative steps and price controls as well as raising rates further and allowing currency appreciation if inflation became a bigger problem, he added.
The benchmark Shanghai Composite Index declined 0.8 per cent this week and has fallen 3.7 per cent in 2011 partly on concerns that tighter monetary policy risked slower growth. China may imminently order lenders to set aside more cash as reserves to drain money from the economy, Australia & New Zealand Banking Group had said on June 10.
‘Delicate’ Transition
“The policy challenge through next year, where you have a delicate political transition of the leadership, is to maintain growth in the eight-nine per cent range while pushing inflation below what it is right now,” said Roubini, the co-founder and chairman of New York-based Roubini Global Economics LLC.
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After next year, the bigger challenge would be “to reduce fixed investment and savings and increase consumption. Otherwise, after 2013, there will be a hard landing,” he said.
Fixed-asset investment expanded 25.4 per cent in the first four months of 2011, as against the same period a year earlier. The nation reported a $13.1 billion trade surplus for May, with surging imports indicating the nation’s demand may support global growth for now while adding pressure for higher interest rates.
China could sustain economic growth of about 9.5 per cent this year and next even as the government cools the real-estate market and reins in bank lending, the International Monetary Fund had said June 9. Consumer prices rose 5.3 per cent from a year earlier in April, exceeding the full-year target for a fourth straight month.