The Next Phase for China

China’s economic slowdown appears to have stabilized,reducing the risks of a hard landing despite what hasturned out to be an overextension of credit formation since 2008 that has resulted in an oversupply of commercial and residential real estate. Although both traditional and shadow banking has resulted in excessive credit formation that will almost certainly result in credit losses, China has adequate fi nancial resources in the form of large capital reserves to absorb such losses. Now, facing another threat from a European recession that will reduce China’s export trajectory, the world’s second largest economy may be ready to begin restimulating economic growth in 2012 in order to avoid a slowdown in other parts of the world, in a smaller version of what it did in 2008.

However, the next wave of China stimulus will probably be much more centrally controlled at the federal government level and more focused upon sectors that are not currently overcapitalized. Stated another way, the next wave of expansionary initiatives is likely to be done through state controlled banks as China attempts to rein in shadow banking, and likely directed at sectors and industries that represent the next stage in China’s planned growth into a its next stage as a more advanced developing economy. That means that the next phase of hinese expansion is likely in the technology and information industries, moving beyond last decade’s focus on core durable goods manufacturing industries. China had previously announced that it had seven “emerging industries” in mind that it wanted to expand, and it is conceivable that its desire to offset a likely European recession combined with its apparent success in reducing infl ation and achieving a soft landing may make 2012 the right time for China to launch that initiative.