China’s rebalancing from an economy dominated by investment to one that rests on consumption continues.
But it’s likely to be a “protracted process” according to rating agency Fitch.
In a new report which says that a “China hard landing remains (the) key risk to global growth” Fitch highlights that “the considerable challenges China faces in this transition are clouding the medium-to-long term growth outlook.”
They say a hard landing is not their base case but risks remain [our emphasis]:
A hard landing has never been Fitch’s core scenario. That said, the dilemma China’s authorities face between structural reforms and managing the pace of the slowdown is sharpening as vulnerabilities in the economy remain. Imbalances in the economy, ranging from significant oversupply in certain corporate sectors, the potential of a large build-up in bad loans in the banking sector and the outsized role of capital investments in the economy, each has the potential to trigger a sharp deterioration in macroeconomic and financial conditions in China and elsewhere.
The good news according to Fitch is there will be no hard landing in 2016.
“The policy tools available to the Chinese authorities – and their willingness to employ them – mean China is likely to avoid a hard landing in 2016” the company said.
It’s natural for a ratings agency to focus on risks. That’s important in reading and understanding where Fitch is coming from with this report and why they temper what appear to be extremely bearish concerns with statements such implying these risks are not their “core view”.
Yet Fitch highlights the imperatives facing authorities in Beijing are large and in some cases urgent.
With the bias toward highlighting risk in mind Fitch says, “the new risk bubble introduced in this edition looks at a scenario whereby ongoing pressures on the yuan and capital outflow are exacerbated to the point that a large devaluation results”.
Again Fitch counters its own argument by saying this is not likely.
But the company highlights that “the urgency of this risk reflects our opinion that investor sentiment can turn quickly against China’s economic prospects, against a backdrop of slowing global growth, led principally by emerging economies, volatile commodity prices, and further interest rate
increases in the US”.
That, they say, means if the risk does materialise “it could trigger very significant global financial market volatility that hit the region’s economies in a hard way”.