Soc Gen Thinks China Has Lost Control

The French bank Société Générale released a report, advising clients that it thinks China will suffer a “hard landing” that will likely be inflationary, due to excessive liquidity.

In a report titled “The Dragon Which Played With Fire” (catchy), SocGen points out that China has injected its own brand of Quantitative Easing into its economy, roughly 50% of Chinese GDP over the last two years—dwarfing The Bernank’s similar efforts in the United States.

The SocGen team thinks the Chinese have not drained this excess liquidity, and that it will be the regime’s undoing.

“Policymakers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points,” says the report. It was written by Alain Bokobza, Glenn Maguire, and Wei Yao.

The report goes on to say that “The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation”—not happy news. 

Under its “risk scenario”, which represents a 30% probability, SocGen sees a Chinese market spike towards the mid-year, then a collapse in the second half of 2011. 

The report goes on: “We think growth could slow to 5 per cent by early 2012, which would be a drama for China. It would be the first hard landing since 1994 and would destabilise the global economy. It is not our central scenario, but if it happens: commodities won't like it; Asian equities won't like it; and emerging markets won't like it.”

Frankly, nobody’s gonna like it.

The Hourly G hasn’t been able to get its grubby little hands on the PDF of the entire report, just the highlights and bullets. But readers can find further analysis and commentary here, here and here.