A very uncomfortable Chinese recovery
Chinese hard landing fears have been receding over the last couple of weeks and a large one-off depreciation has been avoided, at least for now.
This is completely in line with the scenario we described earlier (see here and here for example).
The combination of monetary, budgetary and relaxation measures with regards to housing are driving a cyclical recovery. But while we were right on this call, we are still convinced that the medium to longer term outlook remains extremely challenging. Moreover, it would not be surprising that worries about the sustainability of the current recovery soon pop up again. Indeed, the background of fake growth figures, soaring house prices and continued rapid credit growth is far from comfortable and will give rise to more and more concerns about the state of China’s economy. How will Chinese policymakers reconcile the ambition of strong growth and the need for further economic rebalancing while at the same time avoiding the stop-and-go policies seen in recent years? The short answer is that this will prove close to impossible. That’s why, despite the recent calmness, concerns about China look set for a comeback in the not so distant future.