Views | Is it time to worry about China?

Views | Is it time to worry about China?

Europe has dominated investor fears over the past six months. Is it time to take a hard look at China as well?

Yet, economist Nouriel Roubini this week described a soft landing in China as “mission impossible". Private equity firm Kohlberg Kravis Roberts has decided to set up a special situations fund in Hong Kong in anticipation of buying opportunities in case China suffers a hard landing. The price of copper --- a proxy for Chinese economic growth --- hit a three-month low this week.

The Chinese have pulled off an astonishing economic miracle over the past 30 years, but some of the weak links in the strategy could now get tested. A huge boom in investments financed very cheaply has led to an economy where capital has not been used efficiently. The recent move by the Chinese sovereign fund to recapitalize banks is a sign that a lot of their lending could be in trouble. Very low interest rates on bank deposits have pushed household savings into speculative investments such as real estate. The suppression of domestic demand has made such a large economy unusually exposed to what happens in Europe and the US.

These are some of the issues that the China bears have been hammering away at. The ability of the Chinese authorities to manage these risks should not be underestimated. But the massive stimulus in 2008 and 2009 that insulated the Chinese economy from the worst effects of the global downturn was based on yet another investment binge and credit boom. It was an effective short-term fix. However, the more complex job of liberating domestic consumers, reforming the financial system and letting the currency appreciate did not get the attention they deserve.

A soft landing still seems more likely than a hard landing. But even a gradual loss of economic momentum in China as well as a gradual appreciation of the yuan could help India, because global commodity prices could decline and Indian exports could become more competitive. Of course, specific groups such as iron ore exporters to China could get hurt.