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China’s Slow Road

NOTTINGHAM – As the eurozone crisis deepens, investors worldwide are sifting through the semantics of China’s economic-policy pronouncements with increasing desperation. They seek signs of an economic “miracle”: a rerun of the RMB4 trillion ($628 billion) stimulus of 2008 that maintained impressive Chinese growth as the West slipped into recession – and shielded the global economy from a worse collapse.

But rolling out another investment program on such a scale would be financial suicide for China. Investors worldwide must face an uncomfortable reality: China’s economy is slowing, and will likely continue to do so.

Analysts have been quick to predict whether the China’s economic landing will be hard, soft, or bumpy. But vague labels hold little value, given sharp disagreement over their meaning. Indeed, while economists often define a hard landing in terms of declining GDP growth rates, placing it at 4-7%, a simpler model based on the principles of econometrics is enough.

According to this measure, a soft landing indicates a short-term fall in economic growth – a fluctuation rather than a trend. A hard landing reflects a structural break – an intense downward adjustment that would prevent China’s economy from rebounding for at least three years, and possibly for much longer. Of the two scenarios, the most compelling evidence indicates the latter for China.