Thursday, June 30, 2011

Can China Achieve a Soft Landing?

In a June 23rd Op-Ed in the Financial Times, Chinese Premier Wen Jiabao attempted to boost global confidence in China’s economy, boasting about their “steady and fast growth” and their “flexible and prudent economic policies.” We wish we shared Premier Wen’s conviction.

Recent data suggests that China’s economy has actually been slowing noticeably of late, along with many other global economies. This is welcome news in China, however, as they’ve been applying the brakes for the better part of the past year in response to a red-hot real estate market and steadily increasing inflation. The hope is that they haven’t gone too far and risked a major downturn.

China’s ability to achieve the proverbial soft landing is more critical than ever, since developments closer to home aren’t terribly encouraging. U.S. monetary policy is about to become less accommodative (QE2 ends today), and however the debt ceiling stalemate turns out, I think it’s safe to assume that fiscal policy is about to become less supportive, too. Meanwhile, Europe is desperately battling their debt crisis, and Japan is still trying to recover from the devastating earthquake. In other words, the global economic recovery appears to be approaching a perilous spot.

It may be wishful thinking, but if China is able to thread the needle and successfully quelch inflation without sinking their economy, which is a tricky thing to do, it would provide a huge lift to a world economy that is still struggling to find solid footing two years after the last recession ended. Let’s hope that Premier Wen's confidence isn't misplaced.