IMacro Skinny J.P. Morgan September 12, 2012 China: this is not what a hard landing looks like 1/ Chinese activity seems to be stabilizing at weak levels, but not free-falling. Yet most of the street is still assigning a relatively high probability of a hard landing scenario, predicated on a severe real estate bubble collapse. The housing market has admittedly lost steam since late last year, but more recently, momentum has turned positive again. Indeed residential prices and home sales are pointing up (left chart), while cement and steel production are far from suggesting a free-fall scenario (right chart). Importantly, housing momentum is turning without any direct fiscal or monetary help. When true bubbles (like the US, Spanish and Irish ones) were `ready to explode', nothing could stop them from doing so. The stabilization in Chinese housing markets rejects the bubble hypothesis and the hard landing case along with it. Housing prices end sales stabilizing Sq. meters, YoY %change 100 60 60 40 20 0 -20 -40 2005 70-city index Secondary market real estate prices Sales transaction volume 2006 2007 2038 2009 2010 2011 Source: CNBS.CEIC.E. Morgan Private Bank. Data as olAugust. 110 105 100 95 Show me the Wean mn tons produced.seasonally-adjusted (both axes) 200 Cement 160 • tre°11Z4 180 140 120 100 80 2006 2007 2008 2009 2010 2011 2012 Settee:CMS,. Morgan PnvateBank Data as of August. Steel Forced steel plant shutdowns Lehman shock 65 60 55 50 45 4D 35 30 2/ Recent announcements of several infrastructure projects totaling ltm RMB, and the urgency in which these policies were communicated, are a clear indication that the government is willing to use fiscal policy to put a floor on economic growth'. Infrastructure investment growth is already showing up in the data (left chart) and the recent improvement in bank credit suggests that more spending in this area is underway (right chart)2. More infras