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Xie Yu

China’s economy returned to an old growth pattern — credit-driven, investment-intensive — in the last few months.
Analysts now ask if the authorities have been clear enough about their reform policies, given the risks to the Chinese economy that grew 6.9 per cent in 2015, the slowest pace in 25 years.
“I am deeply worried about the Chinese economy in the medium- and long-run and do not see a way out,” Vincent Chan, head of China research at Credit Suisse, said. That’s despite recent stimuli to the property market, he said.
He is “most bearish” on China’s outlook for getting out of debt.
“We have to watch this leadership — inventing so many economic reform terms, from “Likonomics” and “supply side reform,” Chan said. “The effect is limited in addressing the problems of overcapacity and ratcheting up debt.”
Imminent risks for China are manageable, because the economy is now “financially solid”, but weaknesses may build, Chan said.
I am deeply worried about the Chinese economy in the medium- and long-run and do not see a way out
Vincent Chan, head of China research at Credit Suisse
Chinese authorities have eased credit regulations, lowered down payment requirements and cut taxes. Two-thirds of the 70 major Chinese cities said new home-price rose in February. While the floor space of houses newly started is still below the amount sold, indicating developers are becoming more prudent in their market outlook.
Chinese manufacturing expanded for the first time in nine months in March. The official manufacturing purchasing managers’ index rose to 50.2 last month from 49 in February. A figure over 50 shows growth, below that level, contraction.
The Shanghai Composite Index, the mainland stock benchmark surpassed its crucial 3,000-point level as investor sentiment warmed. It traded at 3,056.77 on Wednesday morning, almost 15 per cent up from a recent low in late February of 2,673.11.
Chan said the A-share-market rebound might last another one or two months, as global equity markets pick up and the appetite for risk rises. The fundamental change in the macro-economic outlook could prove a stumbling block, he said.
Also on the downside, rating agencies Moody’s and Standard & Poors (S&P) revised the Chinese government’s credit rating to “negative” from “stable” last month.
“The government is making significant reforms,” S&P analysts said in a note. Still, a “negative outlook is partly motivated by our opinion that the pace and depth of the state-owned enterprise (SOE) reform may be insufficient to attenuate the risks of credit-fueled growth.”
Fitch Ratings kept China’s sovereign rating “stable.
It did express concern for the county’s growing debt ratio and drew scepticism over its reforms in a note sent on Tuesday.
“Elements of a policy on addressing over-capacity in certain sectors have been articulated — particularly coal and steel — but they do not add up to a convincing strategy, given the scale of the issue,” Fitch analysts said in the note. “Financial reforms, such as deposit interest-rate liberalisation in November 2015, have been undercut by monetary easing that has kept the system flooded with credit.”
“The authorities’ 2016 policy targets imply that the economy will grow more leveraged, with a 13 per cent aggregate financing growth against an implied nominal GDP growth target in the single digits. Much of the detail remains to be filled in, even three years into the current top leadership’s term of office,” Fitch analysts said in the note.
Increasing debt has overrun and will outpace China’s economic growth. Unless those in power push large-scale debt restructuring, that trend will continue, Chan said.
“Total borrowing will rise to 300 per cent of the GDP before 2020, from the current 250 per cent level,” Chan said. “Historically speaking, economic growth halts when the debt ratio climbs that high.”
Goldman Sachs economists shared that view. They said in a recent research note that near-term credit risks in China were manageable. Medium-term challenges remain, they said.
“The government for the first time set a total social financing target of 13 per cent for 2016, meaning that credit growth will likely continue at a pace above nominal GDP growth,” the report said. “Our China banks team recently revised their estimate on potential non-performing loans in the banking sector to 8-9 per cent, compared to our previous estimate of 4-6 per cent and 1.7 per cent reported NPLs at the end of 2015.”
Credit Suisse’s Chan said the most straight-forward solution for China was to accept economic growth will slow to 2 or 3 per cent compared with the double-digit expansion of previous years and that it must adopt drastic restructuring. Politically that is impossible, he said.
“Hopefully the new-economy segment, which is thriving in cities like Shenzhen and Beijing, could offset the weakening in the traditional economic sectors,” Chan said. “Sadly this sector remains so underrepresented in the A and H share markets.”


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Chinese authorities have eased credit regulations, lowered down payment requirements and cut taxes.The floor space of houses newly started is still below the amount sold, indicating developers are becoming more prudent in their market outlook. Photo: Imaginechina

Vincent Chan, Head of China Research of Credit Suisse, speaks at the press conference on China Manufacturing Purchasing Managers' Index at Four Seasons Hotel, Central. 08 May 2006

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A pedestrian holding an umbrella and her wallet walks past the word "CASH", part of a sign on a street at a shopping district in Tokyo, Japan, March 7, 2016. Japan's economy shrank at an annualized 1.1 percent in the final quarter of last year, revised up from a preliminary reading of a 1.4 percent contraction, Cabinet Office data showed on Tuesday. REUTERS/Yuya Shino TPX IMAGES OF THE DAY

A man uses a mobile phone in front of a logo of Tencent at the Global Mobile Internet Conference (GMIC) 2015 in Beijing, China, April 28, 2015. China's Tencent Holdings Ltd launched on Tuesday an operating system for internet-connected devices such as TVs and watches that is open to all developers, taking on domestic rivals Alibaba Group Holding Ltd and Xiaomi Inc in the smart hardware space. REUTERS/Kim Kyung-Hoon

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(160316) -- WASHINGTON D.C., March 16, 2016 (Xinhua) -- U.S. Federal Reserve Chair Janet Yellen speaks during a news conference in Washington D.C., capital of the United States, March 16, 2016. The U.S. Federal Reserve on Wednesday kept its benchmark short-term interest rates unchanged as widely expected, noting that "global economic and financial developments continue to pose risks" to the U.S. economy. (Xinhua/Bao Dandan)

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A man carries his shopping bags on a busy street in Shanghai on April 1, 2016. Chinese factories ramped up activity in March for the first time in nine months, official data showed on April 1, offering a positive signal for the health of the world's second-largest economy. / AFP PHOTO / JOHANNES EISELE

Chinese President Xi Jinping arrives for the opening ceremony of the National People's Congress in the Great Hall of the People in Beijing on March 5, 2016. China’s Communist-controlled parliament opened its annual session on March 5 and is expected to approve a new five-year plan to tackle slowing growth in the world’s second-largest economy. / AFP / WANG ZHAO

China’s economic growth may drop to 5 per cent a year at start of  next decade, says central bank researcher  

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.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Senior analyst said he is “deeply worried”

Senior analyst said he is “deeply worried”