Turmoil and volatility will continue to stain the Chinese economy throughout 2016, with the Year of the Monkey likely to bring significant risk, says NAB Group Economics.
In an economic update, NAB Group Economics said the Year of the Monkey is set to be “riskier than has been the case in recent years”.
NAB Group Economics pointed out that throughout January China’s two main share markets, Shanghai and Shenzhen, experienced significant falls from their end-2015 levels – down 23 per cent and 27 per cent respectively.
“Policy measures intended to support these markets following the mid-2015 correction have proved largely ineffective,” the update stated.
NAB argued that continued volatility in Shanghai and Shenzhen will continue to impinge on China's economic outlook.
“Arguably the most important is the impact on equity financing for Chinese firms – which are generally highly leveraged – with Chinese investors likely to be more risk averse in the short term, limiting the potential for a much needed rebalancing in corporate financing.”
The update pointed out that China’s debt levels, and its ability to grow, will also substantiate as a foremost concern this year.
According to NAB, total debt has grown rapidly since the global financial crisis, outpacing economic growth since 2012. China’s total debt – including bank loans, other social financing and government bonds – totalled just over 250 per cent of GDP in December 2015.
“This figure excludes parts of the country’s shadow banking sector – which we previously estimated at up to 100 per cent of GDP in late 2014 – meaning that a broader estimate of China’s total debt could exceed 300 per cent of GDP,” the update said.
NAB noted that China cannot continue to allow debt to “grow unchecked” – “to do so would increase the likelihood of a major financial crisis and a hard landing longer term”.
However, managing this debt will mean a lower economic growth rate, which is likely to be met with considerable political opposition.
NAB forecasts China to grow at approximately 6.7 per cent in 2016, down from 6.9 per cent last year.
“However risks to this forecast are clearly weighted to the downside," the update concluded.