While investors remain anxious about China's transition to
slower growth, there are good reasons to believe that the
country could avoid a crash, according to Legal &
General Investment Management (LGIM).
The sharp rise in Chinese debt in recent years has raised
concerns about a hard landing, but LGIM believes there is a
possibility that China could achieve a gradual slowdown in
growth, averting a major macro shock.
are three reasons for our view. First, deleveraging pressures
in the economy as a whole are not intense, there is also
flexibility available in implementing macroeconomic policy
measures and there is already evidence that some structural
reforms are starting to take effect" said Brian Coulton,
economist at LGIM.
level of debt is not excessively high by international
standards and is mainly funded domestically, according to
He pointed to
a surplus of savings in the household sector, which is more
than sufficient to fund the borrowing requirements of
corporates. The interest burden faced by the corporate sector
is also rising but remains relatively low.
choices are more constrained than in the past the Chinese
authorities still have the option of easing monetary policy,"
to some emerging markets China is unlikely to see its monetary
policy choices restricted by swings in global capital flows.
This flexibility should help to smooth the path towards lower
November's Third Plenum meeting set out a very strong agenda
with the aim of reinvigorating the role of the private sector
in the economy, increasing market pressure on state-owned
enterprises and encouraging the rebalancing of the economy
towards the consumer and service sector.
on, the reforms are already coming through, with evidence of
progress in state enterprise reform.
"None of this is to deny the risks that have built up in the
aftermath of the recent rise in debt. The rapid expansion in
the shadow finance sector, the potential for non-performing
assets to emerge in the banking system and the possibility of
mistaken choices in a more constrained policy environment all
pose a threat," added Coulton.
"But a path for the economy that involves a gradual
stabilisation in the credit ratio to GDP and a better
allocation of credit without an abrupt macroeconomic shock,
does not look out of reach."