Focus Asia (Q3 2011) - Soft spot or hard landing? - Credit Suisse

The economies of China and India are slowing. That much is clear. What is less certain, however, is whether the recent weakness represents a short-lived soft spot or the beginnings of a hard landing. Indications from the developed world are starting to look a little more encouraging again, but the two Asian giants are not necessarily beholden to economic developments in the US, Europe and Japan. Instead, a powerful and, as yet, uncompleted tightening of the domestic monetary screw, in response to high and sticky inflation, will likely play the more important role. Apart from anything else, it should help uncover any bubbles that are in existence by bursting them.
India looks reasonably secure on this front, although the property market, big-ticket consumer items and capital goods look set for a rough ride over the next eighteen months. Moreover, the weakness of real money growth suggests that the risks to our bottom-of-the-range 7.5% GDP growth forecasts for 2011/12 and 2012/13 are to the downside.

China presents a bigger cause for concern, in our view, not least because debt has been widely used to finance a property price boom, as well as a lot of economically questionable projects. Many small and medium-sized companies are also now showing signs of distress. The Chinese government should be able to head off a recession, but probably won’t prevent the economy from experiencing what could be termed a “sluggish landing”. Our GDP growth forecasts of 8.7% for 2011 and 8.5% for 2012 hardly sound disastrous, but would, if correct, represent the weakest performance over a two-year period that the economy has experienced for more than a decade. If China does catch a cold, the rest of Asia will suffer to varying degrees even if the Western world is reasonably fit and healthy.