Debt in China grew by its largest factor since 2009 in 2016, helping the economy hit the official government growth target of 6.5 per cent. But support for credit-funded growth is starting to wane, Newton Investment Management global strategist Brenden Mulhern says.
“As we head into 2017, economic momentum generated by this dose of stimulus is likely to fade given the authorities have already begun to reduce policy support,” Mr Mulhern said.
“The authorities are well aware of the risks that mounting leverage poses to the Chinese economy.”
Mr Mulhern noted that “in April of last year, an unknown senior figure, widely held to be President Xi [Jinping] or one of his closest allies announced that the credit-funded growth model could not go on”, with the Chinese credit bubble having now surpassed those of Japan, Ireland, Spain and the US.
Chinese authorities have shown support for structural reforms instead of continued credit-funded growth, but are “constrained” by the need to deliver more jobs, Mr Mulhern said.
“With the 19th National Party Conference in the third quarter, this constrain will be no less restrictive. Pacifying economic growth remains the order of the day for 2017.
“As such, it will not take much of a slowdown of the economy to prompt the authorities to prime the policy pumps once again.”
Signs of stress in the economy are becoming increasingly apparent and “policymakers are facing an ever more difficult task keeping all the plates spinning,” Mr Mulhern concluded.
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