China may have 9% GDP growth in 2012

China can still achieve soft landing amid global turmoil

Usually it does not take writing a report to maintain forecasts, but this is not a usual time. The US and Europe are at increasing risk of recession; stocks plunged across the world; and surging VIX, the "fear gauge", suggests the anemic uncertainty could once again hit the global economy.

Wall Street economists are slashing growth forecasts of major developed economies, and most economists in emerging Asia could follow suit. What about China? The world is closely linked, but nations may not always move in the same direction.

Growth, inflation and policy in 2H11

Though China's faster-than-expected 9.5% YoY GDP growth in 2Q11 did cool down the debate on hard/soft landing since mid-July, a new round of downgrading is in the making. Exactly like what happened last year, our once below-consensus growth forecasts will soon be above consensus again. However, we believe there is no need to revise any of our growth, inflation and policy forecasts:

We maintain 9.3% and 9.0% GDP growth for 2011 and 2012 (9.0-9.1% in 2H11 versus 9.6% in 1H11). We expect QoQ growth at 2.0-2.2% in 3Q-4Q11. For CPI inflation, we stick to an annual average of 5.2% and 4.0% in 2011 and 2012. CPI inflation has likely peaked in July 2011.

For policy, we expect a "Loose fiscal, tight monetary" stance: For the rest of 2011, we expect neither cut nor hike on interest rates, RRR, M2 growth target and annual loan quota; But we expect fiscal policy to be more "proactive" (contingent on situations in the US and Europe) by raising fiscal spending on social housing, water projects and other public works.

Why China's growth could be resilient

First, China is less dependent on exports than 2008 thanks to a shift towards domestic demand. Second, since China maintained stable growth when sequential growth in US/Eurozone has already slumped in 1H11, China could sustain its stable growth in 2H11 if the US/Eurozone posts flattish sequential growth in 2H11 from 2Q11. Third, Beijing has the will and tools to stabilize growth as 2011-13 is the period for the power transfer and the fiscal situation is still fine.

The black swan scenario: What if "Lehman II"

Both our global economics team and the markets believe that a breakup of the single currency is still a low probability event, so our forecasts on China are hinged on this key assumption. But in case the global financial system freezes again on a major disruption of Eurozone, China could be heavily hit (there is no complete decoupling). However, it's our view that even in that extremely low probability scenario, China's policy response could be quite different from the "RMB4.0tn" in the previous crisis.