The Landing Will Be Hard

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As we have opined in previous posts on its banking system and real estate market, China's economy is in a pretty bad shape. This is corroborated by a couple of recent economic statistics. Last Sunday, China's National Bureau of Statistics published the new housing numbers for February, saying that

Comparing with the previous month, among 70 medium and large-sized cities, the sales prices of newly constructed residential buildings declined in 45 cities while that of 21 cities remained at the same level. For 4 cities with increasing prices month-on-month, the increases were 0.1 percent.

The real economy (as opposed to asset prices) is not doing great either. On Thu HSBC's manufacturing
PMI showed another month of contraction, coming out at 48.1. This follows on the heels of China's trade position turning into deficit for the first time in 20 years and inflation and new bank lending disappointing. The market has taken notice with the AUD declining and global equities weakening.

It still looks like investors believe that Beijing will be able to prop things up. They do have $3.2tr of foreign reserves after all. And they have started doing just that. From unpublicized increases of QFII quotas, to artificially setting the RMB fixing higher, despite the downward pressure, it appears that Beijing is trying very hard to build a dam to prevent markets from reacting to the negative data. The real issue is what happens if and when the dam bursts.