China's macroeconomic rebalancing and its associated risks remain the main source of uncertainty for the global economy, especially the Asia-Pacific (APAC). Easing policies implemented by the Chinese authorities in recent quarters reduce the risk of a hard landing in 2016, but long-term macroeconomic imbalances remain, says Fitch Ratings in the Risk Radar Asia-Pacific report.
Chinese policy-makers also have to decide the pace at which they introduce structural reforms, while managing the pace of the growth slowdown, Fitch says in the report.
A sharper devaluation of the Chinese yuan could trigger significant financial volatility, both in APAC and globally, according to an alternative scenario to Fitch's base case. A weakening Chinese economy, uncertainties over economic strategy, and a loss of investor confidence could lead to higher-than-expected net capital outflows from China. The resultant downward pressure on the yuan has the potential to trigger further market instability beyond the Chinese border. The above development is unlikely, though investor sentiment can turn very quickly, Fitch says in the report.