24 Jul 2013
Flash: Risk of China experiencing sub-6% growth scenario 10-20% - Nomura
FXstreet.com (Barcelona) - Nomura Economists expect China’s GDP to grow by 6.9% in 2014, yet they admit to see the risks skewed to the downside, due to high level of leverage in the economy and its slowing potential growth rate.
Key quotes
"We believe that the likelihood of China experiencing this risk scenario is 10-20%, i.e. we no longer see it as a small tail risk because the economy faces stress from many dimensions, including financial leverage, pollution and social tensions."
"In our risk scenario, GDP growth slows to 5.9% for full-year 2014 and to 5% in H1 2014. Given the high level of leverage in the economy, policy tightening may lead to a faster deleveraging process, higher interest rates and a credit crunch, all of which would combine to cause a sharp slowdown in economic growth."
"We do not take the risk scenario as our baseline case, because we think the government can take action to smooth out the deleveraging process and growth slowdown so as to avoid financial sector meltdown. The banking sector is fully under the government control. We do not think government will allow banks to fail. Hence the transmission of corporate default may not
be amplified through bank failure. This is the key difference between financial risks in China and market economies."
Key quotes
"We believe that the likelihood of China experiencing this risk scenario is 10-20%, i.e. we no longer see it as a small tail risk because the economy faces stress from many dimensions, including financial leverage, pollution and social tensions."
"In our risk scenario, GDP growth slows to 5.9% for full-year 2014 and to 5% in H1 2014. Given the high level of leverage in the economy, policy tightening may lead to a faster deleveraging process, higher interest rates and a credit crunch, all of which would combine to cause a sharp slowdown in economic growth."
"We do not take the risk scenario as our baseline case, because we think the government can take action to smooth out the deleveraging process and growth slowdown so as to avoid financial sector meltdown. The banking sector is fully under the government control. We do not think government will allow banks to fail. Hence the transmission of corporate default may not
be amplified through bank failure. This is the key difference between financial risks in China and market economies."