The BlackRock Institute 2014 mid-year investment outlook said reform is the only way China can resolve this unsustainable growth, although this may dampen growth in the short term.
BlackRock said the ability of Chinese policymakers to achieve this will depend on China’s exports, which make up a quarter of GDP.
“Any downside surprises to export growth could cause the government to stall or even dial back reforms,” said the outlook.
BlackRock said while it considers predictions for a credit blowout to be excessive, with leverage containable, the firm is worried about the torrid growth in credit, “especially in the shadow banking system of securitised corporate loans”.
The outlook said the property market, which makes up an outsized share of the economy, may be the greatest challenge for Beijing and the government will need to “engineer a slowdown without hurting growth too much”.
In regards to emerging markets overall, BlackRock said weak growth in recent years is “setting the stage for a cyclical rebound over the next year”.
“The currencies of the ‘fragile five’, Brazil, India, Indonesia, South Africa and Turkey, declined sharply as the market punished countries with large external deficits,” said the outlook.
“There are signs this bitter medicine may be making them more competitive again – current account balances are forecast to recover,” it added.
BlackRock said its main investment theme is “divergence among emerging market countries”.
“We favour countries with strong balance sheets that are implementing reforms to make their economies more competitive, such as Mexico,” the outlook stated.
