Report: China’s Risk is Relevant But Still Manageable

China’s risk is relevant but still manageable, according to Natixis Asia Research. However, the longer it takes for the authorities to tackle leverage seriously, the more costly it will be in terms of potential growth.

“Too fast leverage induced by excessively lax policies will be hard to manage,” says the report. “It fosters additional overcapacity pushing down corporate profitability and, thereby, return on assets. If creditors do not react, misallocation of resources will push down potential growth. If creditors do react, a potential crisis could ensue.

Natixis also notes that banks will continue to offer a helping hand but it might be too much for some smaller banks. The same for some (private/local SASAC corporates) as long as not excessively relevant for the economy.

“While corporate leverage is still massive and creditors (banks) should be thinking twice about their exposure, China’s reality clearly minimizes the risk of an event any time soon. Why? Creditors are mainly domestic; most importantly, they are mainly state-owned, same as the debtors,” says the report.

As for the country’s currency, the RMB is still heading south but in an increasingly cautious way as capital outflows are still a huge problem for China’s economy, according to Natixis.

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