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China's Hard Economic Landing Appears Imminent

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As a percentage of GDP, China's economic stimulus program of 2009 was the largest in the world, and second place to the U.S. in monetary terms. Ironically, the supposedly Communist economy of the People's Republic of China became the last best hope of world capitalism, in the wake of the global financial and economic crisis that began in 2008. Now, it appears, things may be unwinding in a bad way for Beijing.

Copying its capitalist rivals, Beijing's hybrid government/private economy poured massive amounts of cash into creating new asset bubbles, particularly in real estate. China built shopping malls with no customers, cities with no inhabitants and roads with no traffic. Extravagantly redundant infrastructure was constructed with stimulus money, goosing China's GDP with annual double digit growth rates. This model was clearly unsustainable; China's leaders were hoping to buy time so that the nation's major export markets in Europe and the U.S. would recover with their own stimulus programs, and resume their buying spree of cheap Chinese goods.

"Kick the can down the road" became the official credo of economic policymakers responding to the global economic crisis. As with other economies pursuing this shortsighted policy prescription, China failed to address the fundamentals of its economic challenge. The proportion of domestic consumption as a share of GDP in China is less than half the ratio of its customers in the developed world. With its economic ascendancy dependent on overseas customers, the stagnation and contraction of the economies of those customers leaves a void that Beijing cannot cover by building the economic version of sand castles.

With the Eurozone tottering on the edge of the abyss, the U.K. mired in recession and the U.S. growth rate so anemic, even with trillion dollar plus annual deficits, that it is now at stall speed, it appears that the policymakers in Beijing may have lost their stimulus spending bet. Domestically, the Chinese PMI (Purchasing Managers Index) has slumped to the lowest level in eight months. Other indicators, even amid the opaqueness of China's official economic data, point increasingly towards a hard economic landing for the world's second largest economy. The consequences will be dire, not only for China, but also for the global economy as a whole.