China growth challenges increasing, says L&G IM
Legal & General Investment Management has said that while China’s growth will continue, the country faces increasing challenges as it transitions to a slower growth environment.
Emerging Market strategist Brian Coulton said a near term challenge is the expansion of credit. As a proportion of GDP in the past 12 months it has increaesd significantly, raising concerns over the risk of a ‘hard landing’ in the economy.
Coulton notes China’s current account surplus and domestic savings, which make the country less vulnerable to foreign funding. However, he also said that rising debt levels could result in higher interest rates or bad debts.
Hitherto the banking system remains liquid, he said. The non-performing loan ratio is also low. But, easier access to credit is leading to poorer capital allocation decisions, and lower productivity growth as less efficient state owned enterprises are able to gain support.
LGIM’s view is that China needs to focus on three “Rs” – reform, rebalancing and restraint.
“The authorities recognise that maintaining demand without leverage expanding is the key to sustainability of future growth. This is encouraging, but investors need to recognise that achieving this will be harder than it has been in the past,” Coulton added.