China’s economic growth is excessively fuelled by credit, according to a report by Amundi Asset Management.
Although the level of debt, which is mostly domestic, is still manageable, Amundi expects the authorities to curb its growth, which in turn will dampen the growth of the economy.
If the authorities choose, nevertheless, to support growth by further expansion of credit to non-financial corporations, the strategy will sooner or later lead to a significant increase in non-performing loans on banks’ balance sheets.
“This is not sustainable in the long term,” the report states, envisioning dire consequences such as bank runs, massive capital outflows and strong depreciation of the renminbi.
While noting that the excess debt weighs down China’s economy, and productivity gains are insufficient to maintain the competitiveness of the country’s industry, Amundi estimates the risk of the “hard landing” or bursting of the credit bubble at 20%.
Should the pessimistic scenario become reality, China’s authorities would not be able to keep the country’s currency stable and the impact would spread far beyond China’s borders, with “particularly disastrous” effects centred on emerging markets and challenging the stability of the whole global financial system.
China’s central bank has had, however, substantial achievements in mitigating the debt bubble risks, notes Alex Wolf, senior emerging markets economist at Aberdeen Standard Investments, in his economic briefing.
The People’s Bank of China (PBOC) has reduced interbank leverage, improved regulation and gradually raised interest rates. This has reduced the speed of credit growth to more manageable levels, while the economic growth was supported by strong exports and a rebound in the property market.
The increasing property sales, however, come with their own risks, as mortgage lending, together with consumer credit are inflating a household credit bubble. Wolf notes that “China has never really had a consumer credit cycle before” and that banks and regulators don’t have experience in managing highly indebted households.
2017 growth
In the short term, China’s economy is likely to continue benefiting from its reform momentum as well as export growth and the resilience of real estate in 2017 and early 2018, according to Amundi.
The firm revised its China GDP growth forecast to 6.7% growth in 2017 and 6.6% in 2018, from the earlier targets of 6.4% and 6.0%, respectively.
Three-year performance of the Amundi Equity Greater China Fund and its benchmark, the MSCI Golden Dragon Index and the Aberdeen Global Chinese Equity Fund and its benchmark, the MSCI Zhong Hua Index.
