When China hits the brakes, expect a soft landing

China bicyclesChina's central bank must take action to cool its overheating economy and control inflation, according to Yves Kuhn, portfolio manager for emerging markets at Swisscanto.

But the bank will do its best to avoid a so-called “hard landing”, in which a slowdown in growth to 6% or lower causes widespread job losses.

Instead, Kuhn anticipates a “soft landing” where growth drops to about 8%. This is less than the 9.7% growth figure recorded in the first quarter, but “would still be strong enough to avoid major layoffs and to limit political upheavals”.

This moderate slowdown ought to be enough to kill uncontrolled inflation, according to Kuhn. However, it could hurt exporters in developed countries and cyclical plays linked to China. Economies that depend on exporting commodities would also suffer as China's high growth has kept commodity prices high in recent years. Kuhn also predicts a limited sell-off of risky assets.

©2011 funds europe