Hard landing predicted for China

When China finally tightens its fiscal policy the nation is likely to experience a hard landing, while the global economy will likely go from inflationary risk to deflationary risk in the next 12 months or so, according to Andrew Hunt from Andrew Hunt Economics.

Lots of the recent growth in China has come from capital expenditure at the local government level according to Chinese data, with many local governments spending up to three times their income, Hunt said at the van Eyk conference in Sydney yesterday.

This means that when China finally does tighten we will likely see a hard landing there and potentially some form of sub prime crisis, he said. Then as the core slows down China will look for a weaker currency and will look to rejuvenate the export sector by offering cheap goods for export.

So although there is still talk about inflation on a three to 12 month view, after that it will probably go back to talk about deflation, Hunt said.

He added that the current price rises in manufactured goods price rises were due to the situation in China, which was affecting bond markets, he said.

The credit boom will dissipate, economies will weaken, the service sector will start to deflate, central banks will stop worrying about inflation and by the end of the year they’ll be worried about deflation and slow growth, and talking about a third round of quantitative easing, Hunt said.