FT Alphaville " China's hard landing odds, updated Remember Nomura last year estimated there was a 1-in-3 chance of a hard landing in China? Anyway, they've updated the index on which it was based. Nomura's chief Asia economist, Rob Subbaraman, says the 1-in-3 odds indicated by the China Stress Index remain, but the hard landing is less likely: In June 2011, the CSI rose to its highest level since it was first compiled, but in Q3 it eased, and our latest update shows that it eased slightly further in Q4. The main reasons for the CSI falling are highlighted in Figure 2. Overall, the unwillingness to ease macro policies aggressively despite slowing GDP growth seems to be starting to pay dividends in lessening longer-term macro risks. However, it is still early days and policy errors cannot be ruled out amid still-large macro imbalances and high global uncertainty. We retain our one-in-three likelihood of a hard economic landing commencing before the end of 2014, but now have a bias to think it less likely. Subbaraman and co say the next quarter will be critical, which is difficult to disagree with. But surprisingly (to us at least) there isn't any mention in this update of what a eurozone recession will mean for China. Nomura's analysts don't rate exports that highly in terms of risks to China's growth, at least in terms of creating a big slowdown. As they explained in the original CSI note: Although the advanced economies falling back into recession would hurt China's exports, the economy is too domestic driven, in our view, for external shocks to directly cause a hard landing. The IMF has a different take in its China update out on Monday, which canvasses the global downside scenario outlined in its World Economic Outlook update. This scenario "is more intense than in the baseline (but weaker than following the collapse of Lehman Brothers in 2008) ," and lowers global activity by two per cent. In this scenario: China would be highly exposed through trade linkages. Europe and the United States together account for nearly half of China's total exports. Lower global demand would, therefore, feed back negatively to corporate and financial sector balance sheets, hampering the performance of firms in the tradable sector (where excess capacity is already prevalent), increasing NPLs, and potentially prompting banks to deleverage. This would further reduce investment, employment and growth and could trigger a decline in China's property market. In the absence of a domestic policy response, China's growth could decline by as much as 4 percentage points relative to the baseline projections leading to broad-basedconsumer and asset price deflation. China's vulnerability to external shocks was highlighted in the global financial crisis,when global growth fell by around 6½ percent. In China, even after a huge credit and fiscal stimulus response, which boosted growth by at least 6 percentage points, growth still fell by 5 percentage points. For what it's worth, however, the IMF was on the whole positive about China's ability to minimise the fallout: However, a track record of fiscal discipline has given China ample room to respond to such an external shock. A sizable fiscal stimulus could mitigate, but not fully offset, the decline in its output. In particular, a front-loaded fiscal stimulus of around 3 percent of GDP spread out over 2012-13 would limit the growth decline to around 1 percent, cushioning the adverse effects on employment and people's livelihoods. Got that, CCP? Related links: IMF: China's growth could slow by 4 percentage points if the eurozone blows up - Also Sprach Analyst Not liking those odds of a Chinese hard landing - FT Alphaville This entry was posted by Kate Mackenzie on Monday, February 6th, 2012 at 11:02 and is filed under Capital markets. Tagged with china, Chinese economy, hard landing.