China is likely to tighten policies to contain financial risks this year, with interest rate rises expected in the second half which could bring down economic growth, Nomura Securities said.
The expectation is shared by an increasing number of economists after the government work report, passed last week, noted financial risk for the first time amid anticipated higher financing demand in the year of government reshuffles.
"China is displaying the same three symptoms that Japan, the US and parts of Europe all showed before suffering financial crises: a rapid build-up of leverage, elevated property prices and a decline in potential growth," Nomura economists said in a report yesterday.
"As history has repeatedly shown, the slower the policy response to financial excesses, the greater the risk of a systemic financial crisis."
The mainland's financial system is grappling with rising default risk from loans to local government financing vehicles and property developers, as well as mounting challenges from rapidly growing but under-regulated non-banking activities, the country's banking regulator has warned.
"If the government acts this year with tighter policies - and I expect that - China can still avoid a systemic financial crisis," said Zhang Zhiwei, the chief China economist of Nomura and a co-author of the report.
The tightening in the form of two interest rate rises could slow economic growth to an estimated average 7.3 per cent in the second half of this year, Zhang said.
Many economists have predicted a sustainable recovery in economic growth from 7.8 per cent last year to 8.1 per cent this year.
Fast rising leverage and soaring property prices are restricting further loosening of monetary and fiscal policies. The proportion of social and government financing in gross domestic product rose from 145 per cent in 2008 to 207 per cent last year, while property prices more than tripled from 2004 to 2009.