Roubini Foresees Chinese Hard Landing

Sorry to be brief today, but these excepts from our local Dr. Doom stand on their own (although I know some will take issue with the proportion of the economy he deems to be export dependent):

Let us consider now in detail the evidence that China may be on its way to a hard landing…

The latest batch of macro data from China are mixed but all pointing towards a sharp deceleration of economic growth: official GDP data showing growth down to 9% from the 12% of a couple of years ago; sharply falling spending on consumer durables (autos); falling home sales and sharp fall in construction activity; leading indicators of the manufacturing sector (the Chinese PMI) showing a value of 44.6% (i.e. an outright contraction of manufacturing as a level below 50% indicates a contraction), its lowest level ever since its publication. 9 out of 11 PMI sub indices showed contraction – Output, New Orders, Input Prices, Purchases of Inputs, New Export Orders, Imports, Backlogs of Orders, Stocks of Major Inputs. Output index fell to 44.3 from 54.6 in September, while new orders dropped to 41.7 from 51.3, while the inventory index climbed to 51.4 from 50.5. The decline in total orders has been even stronger than in export orders, thus suggesting a weakening in both domestic and export demand. And the decline in construction activity is without doubt a major contributor to the recent weakness in industrial activity in China.

Note also that manufacturing, which accounts for 40% of China’s GDP, is slowing based on surveys of manufacturers, matching with anecdotal reports of factory closures in China’s south East coast. Industrial production has slowed to the lowest level in 6-years (output rose 11.4% in September, from 12.8% in August). While slowdown may have been exacerbated by the Olympics shut-down, it has been on a slowing trend for months. The Federation of Hong Kong Industries predicts that 10% of an estimated 60 to 70 thousands Hong Kong-run factories in the Pearl River Delta will close this year…

There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year; it needs a growth rate of 9-10% to move every year about 12-14 million poor rural farmers to the modern industrial/manufacturing urban sector. The whole social and political legitimacy of the regime of the ruling Communist party rests on continuing to deliver this high growth great transformation of the economy…

Note that China is an economy is structurally dependent on exports: net exports (or the trade balance surplus) are close to 12% of GDP (up from 2% earlier in the decade) and exports represent about 40% of GDP. Real investment in China is about 45% of GDP and, leaving aside the part of this investment that is housing and infrastructure spending, about half of this capex spending goes towards the production of new capital goods that produces more exportable goods. So, with the sum of exports and investment representing about 80% of GDP, most of Chinese aggregate demand depends on its ability to sustain an export based economic growth.

The trouble –however – is that the main outlet of Chinese exports – the U.S. consumer – is now collapsing for the first time in two decades. Chinese exports to the U.S. were growing at an annualized rate of over 20% a year ago; while the most recent bilateral trade data from the U.S. now show that this export growth has now fallen down to 0%. But the worst is still to come in the next few quarters: after an ok second quarter in the U.S. (boosted by the tax rebates) U.S. retailers hoped that the consumer downturn would be minor: they thus placed over the summer massive orders for Chinese (and other imported) goods for Q3 and Q4. But now the U.S. holiday season clearly looks like the worst that the U.S. will experience in decades and the result of it will be a huge overhang of unsold Chinese good. Thus, you can expect that orders of Chinese goods for Q1 of 2009 and the rest of 2009 will be sharply down dragging Chinese exports to the U.S. into sharply negative territory. And it is not just Chinese exports to the U.S.: until a few months ago the U.S. was starting to contract but the rest of the advanced economies (Europe, Canada, Japan and Australia/New Zealand) were growing at a sustained rate, thus boosting Chinese exports. But there is now strong evidence that a severe recession has now started in almost all of the advanced economies. You can thus expect that Chinese export growth to Europe, Canada, Japan, etc. will sharply decelerate in the next few quarters, thus adding to the fall in Chinese net exports.

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  1. Viv

    China’s biggest export markets are the US, Europe and Japan I believe. All three are in recessions. I’d like to know how China calculates it’s GDP, the impact of substitution and hedonics on the overall equation.

    There were some articles last year that stated that if the environmental cost of Chinese growth was taken into account, that growth was a meagre 1-2% or nothing at all.

    We should all take GDP statistics with a grain of salt. The fact that the chinese stock market was taken down so hard, is an indicator that the economy is not doing well and will in fact not escape recession/ depression.

  2. Robertm73

    The chinese need 8% to breakeven with the population growth and in flux of people from the countryside. 5% would be a depression for them.
    Below 5% we are looking a higher chance of revoultion in the country.

  3. David

    I don’t understand. Why do they need 9% growth? To supply jobs for the peasants? What were the peasants doing before, sitting around in cold storage? Why can’t they go back to doing what they were doing before? Some of these economists make it seems like these people will just pile up in the city with nothing to do but riot. If there is no job demand, they will stay doing whatever it is that they did before.

  4. Anonymous

    I have initiated my own Smoot Hawley for Christmas this year. Keeping my $home and gifting cheese baskets from local source, wild Gulf Seafood, pecan baskets and American Wines. Making charitable donations in the name of others.

  5. Frank

    China and the rest of us exist in a world that has passed Peak Oil (2005). The Growth economy paradigm of the 20th century does not fit this new paradigm, The Law of Peak Oil. Unless we begin to perceive this new reality, and work peacefully towards zero or minus growth and relocalization, the wars of this century will make those of the last century look like child’s play. The curve of human population growth closely tracks the curve of growth in oil extraction and utilization. Unfortunately, the right side of such curves tend to mirror the left side, which is quite steep. Now is the time for change, and the ability to perceive our problems as they really exit is a fundamental change that must happen if we are to leave a reasonable world to our children and the Community of Life. Let us make and hold a positive, but realistic vision of the future and aspire to the strength, courage, wisdom, and perseverance to make the changes required by this necessity a reality. Let us put TechnoFantasy in its proper place, and get on with the hard word. Truly yours, Frank from

  6. Robertm73

    1) Stop the TARP, it is not working and it is a huge waste of money
    2) Slowly stop all the stop gap measure Ben and Hank are doing, once again a waste of money
    3) State that the credit of the US is the most important thing to protect.
    4) breakup freddie and Fanny, into 10 companies, dump in the assests, fund them so they have 10% captial Requirements, revoke there Goverment Guaranty.
    5) Cut Defence spending 25%, end useless weapons programs.
    6) Social Secuirty, Move the retirement age to 70, Freeze benfits at current levels for 3 years.
    7) Drop Corparte Welfare programs.
    8) Privatize USPS and Amtrak
    9) Kill the Department of Education
    10) end the war on drugs, tax all sales. Split proceeds into buckets of Drug Education, Budget reducation. Release all non-violent inmates convited of sales/possieon of narctoics. Lowering the prision budgets. terminate DEA.
    11)BONUS- Break up the DHS, use cost savings to lower deficit.

  7. Mark


    Your gift recipients will be lucky people! Those types of gifts are classics for a reason. Donations are also a good choice for people who need more junk like they need a hole in the head…

  8. Barley

    Saw that a Chinese company walked away from some purchase agreements from an australian mining concern – not sure but it must take some conviction to break a contract and leave a supplier high and dry.

  9. Anonymous

    The difference between US and China is that the Chinese government has huge surplus accumulated over the years. The Chinese Government can use the money to stimulate its economy by pushing out more public projects such as railroad, highway and electric power station.
    I wonder if Prof Roubini has considered this point.

  10. mxq

    the domestic economy is week b/c of a structural fear of financial insecurity. From the Chinapost:

    “Eight out of 10 Chinese save money and reduce spending because they do not trust the government to help out when they retire or if they fall sick, according to a survey published Tuesday. In an online survey covering 6,919 people, 81.8 percent of the respondents said they had to save money for retirement because they had little confidence in the pension system, the China Youth Daily said.

    According to the survey conducted last week, 76 percent cited high medical costs as the factor forcing them to save, the newspaper reported…

    The rest of the 1.3 billion population either have no pension coverage at all or receive a reduced salary after retirement from their employers, which mostly are state-owned enterprises.”

  11. Anonymous

    how could the chinese government react to a slowdown? is this an organization that would consider using foreign exchange reserves and other purchasing power to direct inward? if there is someone that is relatively knowledgeable on a potential mechanism(s) Id be interested to listen. how would american government debt price and yeild be affected by japan china and gulf states among other big buyers?

  12. cm202bc


    I’ll give this a stab, tho i know there are other readers more capable than me to explain it. Just sending the peasants back to the farm isn’t realistic for two reasons. Exposure to modern urban lifestyles has shown them a better style of life. Would you happily return to subsistence farming after seeing an alternative? Numerous social studies have shown that relative social and economic standing has a far greater impact on the human psyche than absolute standing. Basically, you don’t know how bad you have it until you see how good others have it. We can assume that low growth rates and a return to lower standards of living by tens of millions of people would greatly exacerbate social unrest throughout China, and nobody understands how dangerous that can be better than the CCP. Second, a lot of them just don’t have any land left to return to. Economic reform over the last few decades allowed local govts to evict farmers (for a compensation fee, generally insufficient) for industrial development purposes. recent reforms will allow the actual sale of land usage rights, which may not be an economic negative, but will certainly reduce the possible farming workforce.

    “Some of these economists make it seems like these people will just pile up in the city with nothing to do but riot.”

    Read your history, Western as well as Eastern. Sometimes that is exactly what they do.

  13. DJC

    To counter global recession, public works spending:

    China considering 730-bln-dollar transport investment: report

    SHANGHAI (AFP) — China is considering a plan to invest five trillion yuan (730 billion dollars) in the transport sector in the next three to five years, state media reported Wednesday.

    The investments would include roads, waterways and ports, drastically boosting previous plans for investment, the China Business News reported, citing an unnamed source.

    The plan partly overlaps with a previously announced proposal to spend about two trillion yuan in the sector between 2006 and 2020, the report said.

    “The additional funds would be able to boost domestic demand swiftly,” the source was quoted as saying.

    China is ramping up construction to stimulate the domestic economy and create jobs amid a slowdown in overall economic growth.

    The global financial woes were instrumental in slowing growth in the world’s fourth-largest nation to nine percent in the third quarter, the lowest in around five years.

    Last month, the State Council, or cabinet, approved a plan to spend two trillion yuan on construction of new railways by 2020. About 1.2 trillion yuan had already been allocated, state media reported.

  14. Anonymous

    chinas numbers are total bullshit. Everylast one of them, except for maybe the number of people.

    What do you expect from a communist regime that is appearance conscious?

  15. Anonymous

    only 1 in 10 chinese peasants ever left the farm. the rest sit around and smoke opium all day.

    take a trip there and see for yourself

  16. Anonymous

    We have to admit what “our local Dr. Doom” said is true: all economic data indicate a sharper-than-expected slowdown in China; and the worst time is still to come, taking into account that the recession of major economies have just started and China’s export dependance is much bigger than a decade ago. But pessimists always overlook the bright side of things: 10 years ago when China was suffering from the Asian financial crisis, its economic scale was much smaller, with much weaker fiscal positions, and a dysfunctional banking system. Now it has $ 1.9tn FX reserve and outstanding public debts only account for 18% of national GDP (the lowerest among all major economies), with $400 bn fiscal surplus accumulated in the past few years; its banking system remains largely intact in the financial crisis. All this means, China will have little difficulty in taking an aggressive fiscal expansion and maintain its growth above 8% in 09. If this is a long-lasting world recession, we should expect a hard landing in China; but if it is only about 09, China will still have a good chance to get a decent growth.

  17. Anonymous

    Not only is China going to cut back on the buying of treaury and agency debt, it’s seeming more and more unlikely that they will be in the position to buy large amounts of U.S. equities.

  18. Anonymous

    anan. 4:56
    Yea, and Americans sit in prisons or the bedroom and type on a computer all day doing cocaine.

  19. Anonymous

    “chinas numbers are total bullshit. Everylast one of them, except for maybe the number of people.

    What do you expect from a communist regime that is appearance conscious?”

    Insert USA for china and socialist for communist and there you have it. The wheel turns and the banks stay opaque while sucking up our money and paying bonuses. Not a bit of difference between here and there except they manufacture useful items to export and we make CDO’s and CDS’s to export.

    We are so screwed

  20. Anonymous

    I dare say that the peasants in China will probably do better through the next few years then us American peasants. It speaks volumes that folks reading this blog are blind to the near term future (1-3 years) of the American economic system.

  21. Anonymous

    I believe that the Chinese middle class is less likely to revolt than farmers. So consider anyone who has enjoyed a “better life” to stay quiet and follow orders if things get difficult.

    Might be a different situation when it comes to students tho. But some sort of nationalist drive would help to keep order. But after the recent deal with Taiwan they’ll have less of an opportunities to find someone to rally anger against, especially for an indefinite period of time.

  22. bg


    I was trying to digest your ‘Dr. Doom’ intro all day. The moniker was given by NYT because they were trying to rationalize what they considered to be an extreme view that was taking hold. I do not think you are the NYT, so could not tell if you:

    1. Were applying it as a badge of honor for a dissonant thinker.
    2. Agreed with the NYT that he is fringe.
    3. Wanted to distance yourself from the opinion, while also acknowledging its value to the debate.

  23. Yves Smith


    I was being ironic, up to a point. I clearly am a Roubini fan, but one has to admit that he writes in such an adamant fashion that it verges on hyperventilating which does not help his credibility.

    I was around during the days of the original Dr. Doom, Dr. Henry Kaufman. He was held in enormous esteem and moved the bond markets when that was where the action was. And I’ve seen Kaufman speak, he is indeed impressive and often original. So I also have more positive associations with the monicker than most readers probably do.

  24. doc holiday

    I have a new game called economic expert chess, which is a way to backtest or compare what a Roubini says in relation to a Krugman:

    This is a story from about a week ago, which cites Krugman:

    The End of Prosperity

    In a Paul Krugman New York Times op-ed, he discussed currency crises and said he “never anticipated anything like what’s happening now.”

    He cited Morgan Stanley’s chief currency strategist Stephen Jen (his former student) saying since Lehman’s demise, we’ve seen world emerging market currency crises. “So far, the US financial sector has been (at) the epicentre of the global crisis. I fear that a hard landing in EM assets and economies (unfolding in Europe) will become the second epicentre in the coming months, with very damaging feedback effects on the developed world.”

    Already Austria, Hungary, Ukraine, Serbia, Belarus “queuing up for” IMF rescue packages. Jumping from the frying pan into the fire unless they can arrange no-strings loans. Given the gravity of the crisis and danger of its contagion, maybe so or at least escape the worst type IMF demands. They’ve swallowed enough neoliberalism already. It exacerbates their dire condition.

    Europe is now reeling under stress. Heavily pressured by emerging market debt. The Eastern bloc borrowed heavily in dollars, euros and Swiss francs. Some in Hungary and Latvia in Yen. An unpublished 2006 IMF report warned about their most dangerous excesses in the world. Nothing was done to curb them, and finally its authors “had their moment of vindication as Eastern Europe went haywire.” It hit Hungary, Romania and put Russia “in the eye of the storm, despite its energy wealth. The cost of insuring Russian sovereign debt (through CDSs) surged to 1200 basis points last week.” More than Iceland “before Gotterdammerung struck Reykjavik.”

  25. doc holiday

    Russia and Kazakhstan’s five-year credit default swaps (CDS), used to insure against restructuring or default of debt, have narrowed below 500 basis points from levels above the key 1,000 mark, indicating distressed debt levels, a few weeks ago.

    Ukraine’s CDS are quoted at 1,550-1,750 bps, a trader from a European bank said, compared with recent levels near 3,000 bps.

  26. Anonymous

    New Federal Loan Program announced by the Treasury Department.

    A new Federally sponsored loan program is being announced today to help spur consumer spending. The new loan program will be called the Federal Consumer Lending Program (FECOLP). These loans will be available for large ticket consumer items; such as wide-screen TV’s and Automobiles. Interest rates will be fixed every year by the Treasure Department, with an initial rate of 1.5%. The new loan program calls for interest payments to be deferred. On selected items, initially SUV’s, principle payments can also be deferred for up to 10 years. This is expected to jump-start the ailing US automobile industry.

    FECOLP authorizes banks and other lending institutions to sell the loans directly to consumers. The loans are then immediately purchased by Fecol-Mae – a new Government Sponsored Enterprise (GSE) – which packages the loans into government guaranteed AAA rated securities, selling them on the open market. The Treasury Department expects FECOLP Loans – known as “Fecal Loans” by the Consumer Lending Industry – will help spur economic growth, create jobs, and end the economic malaise the country is currently experiencing.

    Part of the Fecal Authorization Act also provides for State Fecal Guarantee Agencies which – modeled on the widely successful Student Lending Guarantee Agencies – would help guarantee the Fecal Loan’s AAA
    bond rating.

  27. Anonymous

    China has gone through more than most and the population tends to stick togeather, thats the good news and now the bad they usally point the finger at some one and its who the finger is leveled at that has a bad day, hope its not us.

  28. tompain

    Roubini as usual is being melodramatic in order to market himself. A hard landing is a slowdown to 5% growth? Makes no sense at all. He says this is a hard landing because higher growth is necessary to accomodate the industrialization of labor, gotta absorb 24 million workers/yr or whatever. Guess what? If there is no work for them, the 24 million workers will stay in the fields where they and a few hundred million others were for decades before China’s recent economic boom started drawing them to the cities. The labor supply is both a cause and an effect of the economic growth in China. Someone thinks 5% growth will lead to revolution? I guess you are too young to remember tanks rolling into Tiananmen Square on TV some years ago. China has even more of ’em now. And a lot more of its citizens who are probably perfectly happy with the status quo. Did you watch the Olympics?

  29. Anonymous

    Riots? Revolutions? Revolution leading to what? China’s long suffering peasants have seen much worse. What really irked them is the growing disparity between the rich and the poor.

    The hard landing that Roubini predicts has already been partially reflected in the crash in the Chinese stock market (which sees little sign of bottoming). The question is whether the Chinese government is able to increase domestic spending (think vast infrastructure projects) As to what Roubini knows about the social and political aspects of the Chinese regime — not likely to be much.

  30. Anonymous

    I agree with the last few comments, as well as that posed by David before.

    I think “Dr. Doom” is accurate, in that a hard slow-down of the Chinese economy to 5%-6% (in a near-worst case scenario) is very possible. But I simply don’t see that as a doomsday scenario by any stretch of the imagination.

    The notion that the Chinese economy “must” grow 8% or greater on an annual basis is really nonsensical. There was a time when such a statement would’ve made sense; namely, the transition from state planned economy to market economy. During all of the ’90s, a very slow Chinese economy *would* have likely translated into revolution… tens of millions of urban Chinese were being laid off from life-long employment/safety net as part of that transition into a more capitalist economy. They *had* to find employment, or their alternative was starvation.

    In 2008, that immediate pressure is long removed. The worst case scenario, the freezing of the urbanization process (which I personally don’t think will happen) isn’t really such a worst case scenario. Rural Chinese still own the land they’ve owned for the last 50 years, and they’ll work it the same way their ancestors have worked these lands for 5000 years.

    So, bottom line: generally agree with Dr. Roubini about his short-term predictions for the Chinese economy, but much more sanguine about its implications on Chinese society on the longer-term.

  31. Anonymous

    “I dare say that the peasants in China will probably do better through the next few years then us American peasants. It speaks volumes that folks reading this blog are blind to the near term future (1-3 years) of the American economic system.”

    Stop with your imbecility. The US economy was going gangbusters until the crash of 1929, and then the bottom dropped out. The same will happen in China. The banking system balance sheets are an absolute farce (much worse than US and Europe) and their “surplus” that some many persons point to are predicated on the loans that they hold not being complete and utter writeoffs. Those US debt instruments will be their BEST assets in the coming years. Who holds all the bs loans on their commercial, industrial and housing ventures?? They do. US, Japan or European banks lending big in China… nope. It sits on their books at 100 cents on the dollar… and its all based on an export economy. Its going to be a hard landing indeed.

  32. Juan

    Tompain, that perspective is static, fails to take account of waht internal market creation within capitalism is, i.e. the transformation of self-sufficient peasants into wage laborers, which is never a smooth process and – as the rise in number of semi-peasants, ‘floating workers’ [and from another angle the rapid growth of the urban population] – helps make clear, not so simple as people in developed economies seem to imagine.

    Such things as desertification, decline in quality of land, population growth, change in property regulations, change in the state’s appropriation of surplus from ‘its’ peasants on one hand and level and quality of industrialization on the other guarantee a contradiction laden, never close to equilibrium, process of proletarianization which, as we’ve seen in parts of LatAm etc, can be characterized as structural undevelopment.

    As peasants are pushed/pulled of the land, the informal or petty commodity sectors grow disproportionately, are in a sense the liminal region between not-capitalist and capitalist production relations,,an unstable, semi-proletariat, betwixt and between.

    From the very beginning, the process has been ‘dripping with blood and dirt’.

  33. Anonymous

    Juan, is your jabbering intended to mean something, or did it just come out of a random word generator?

  34. Anonymous

    Well, I dunno anon, might be ‘random words’ but then again might have to do with limits to development within the actually existing system. Gosh, might even have a bit to do with global limits to an imagined to be ahistoric and limitless capitalism.

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