"China's ambitious deleveraging plans increase the risk of a hard landing, which could take year-on-year growth to 2%," according to Societe Generale's Patrick Legland. A hard landing scenario would see full-year, real GDP growth fall below 5%.
While their central scenario is for 6.9% growth, SocGen thinks at the peak of a crisis "the year-on-year growth rate would dip to 2% and the economy would contract for two quarters."
Global implications
With imports equivalent to 30% of China's GDP, the country is natural a major source of global demand. Asia would be hardest hit because exports to China as a percent of GDP are largest in Asia, SocGen's Wei Yao writes.
As for the rest of the world the impact would be in the blow to investment in China. "We expect investment - which now makes up half of Chinese GDP - to fall more than consumption if China does suffer a hard landing," writes Yao. "And investment has significantly higher import content than consumption, most notably through commodities and machine tools."
Of course, we've already seen how the emerging market rout worsened on concerns of a Chinese economic slowdown and trust defaults.
SocGen's Benoit Anne writes that a hardlanding would deal a "severe shock to the appetite for global emerging market assets."
"If the deleveraging in China goes too far and leads to a hard landing, as in the scenario outlined by our economists above, this would seriously hit the appetite for risky global emerging market (GEM) assets. Weaker growth in China would sap global growth expectations, undermining GEM assets which are highly leveraged to the global growth outlook. It would however also push EM central banks to ease policy, even in countries where there is no easing bias at present."
More from the note:
Does the starting point for the global economy matter?
Our what-if analysis of a China hard landing draws on a wide body of academic research that analyses various shocks and how these disseminate to the global economy. These analyses often implicitly assume the starting point of an economy in equilibrium and with a well stocked arsenal of policy ammunition. The current situation is very different, however, with large output gaps in many of the world's major economies, ongoing headwinds from deleveraging and policy arsenals already depleted. Add a China hard landing to the mix, and we expect the result would be a far greater uncertainty shock than had the starting point been a world in overall good health. Uncertainty would cause corporations globally to hold back further on investment and hiring decisions (even those not directly exposed to China). And, feedback loops from financial channels would further amplify the uncertainty shock as risky asset prices collapse. At the global level, we estimate that the combined uncertainty shock in our China hard landing scenario could exceed 1% of global GDP.
Here's how the hard landing would impact the rest of the world:
Societe Generale