This recent commentary from Societe Generale really cuts to the chase on China’s biggest risks highlighting the two big ones:
“Two types of events could trigger a hard landing in China. First, the experience of 2008 showed that the Chinese economy is vulnerable to trade shocks. The Lehman crisis made exports go into reverse, resulting in the loss of nearly 50 million migrant worker jobs in the two quarters after it took place. Second, a hard landing could be provoked by either insufficient public investment from Beijing or a sharp property market correction, which could also be partly induced by tight policies. Policymakers might choose to do so out of concerns over systemic risks posed by local governments’ unhealthy leverage or rising social discontent on
high housing prices. The point is that they would not deliberately choose to force a fast correction, but as China’s imbalances are already at a precarious level, the room for error and the likelihood of nasty unintended consequences is not negligible.
However, China is unlikely to experience a currency crisis like the Asian Financial Crisis, as it has little external debt and a still largely controlled capital account. The domestic financial market also lacks the clout to trigger a sharp correction, even though the dynamics there could aggravate the situation once the downward trend is set in motion.”
In other words, we’re still talking about an economy that is primarily driven by government spending and foreign trade.