Breakout

Market Awaits Critical GDP Report from China

Jeff Macke
Breakout

Chinese officials are set to release first quarter GDP figures on Friday and the stakes couldn't be higher for markets around the world. No one questions whether or not China is slowing; the issue is whether or not the Dragon nation can pull off the elusive "soft" economic landing.

China itself has estimated full year GDP of 7.5% and analysts expect about 8.3% growth for 2012. The spread between the two numbers suggest both that the Chinese are sandbagging and that growth will slow in the back half of the year. Neither should come as much of a surprise.

"Potentially China could be a hard-landing," says Doug Cote, chief market strategist at ING Investment Management. The Chinese "are having problems with their property market" adding shrinking imports and a dropping trade surplus as other factors on the long list of Chinese headwinds.

It's a harrowing list of concerns and Cote hasn't even touched on the suspect nature of the figures themselves. Many analysts suspect the Chinese don't have as real a handle on their economy as they'd like the world to believe.

Cote isn't too worked up about Friday's one-off figure but he is paying close attention to China's growth estimate for the year.

"If they don't beat 7.5% (GDP growth for 2012) and they go below 7% we call that a hard landing," he says.

Such a hard landing would leave a mark on the U.S. economy but it may not be the end of the world, so to speak. Citing Viet Nam, South Korea, Thailand and Frontier markets (FRN) such as Africa, Eastern Europe and Nigeria, Cote believes the influence of China on globalized growth may not be as great as it once was.

"For the first time in history there's a broadening of economic growth," he says, "that could mitigate a Chinese hard landing." The growth in those regions would be hit "on the margins" by a Chinese slowdown but it wouldn't kill them.

Despite all of the above, Cote is reluctant to overemphasize China's problems. The nation is undergoing a shift from centralized economic control to a more American style entrepreneurial system. Growing pains or not, such an evolution has to be considered bullish.

Also easing Cote's fears are is the ability of China's central governments ability to move the needle however they want, or at least claim to. "With the new premier they'll do anything at their disposal to make sure they meet that (target of 7.5%)."

That's the good thing about being a quasi capitalist, government controlled state: Even if your efforts to control the economy fail, you can still report whatever you want.

Please answer our poll question below: Will the Chinese economy see a hard or soft landing in 2012?

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