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.”