Massive government stimulus to limit the risk of a sharp slowdown in China

Stock and currency market turbulence has intensified concerns about a possible hard landing in China. It is true that the economy is slowing but there is limited risk of a sharp slowdown this year. Strong headwinds for the manufacturing and export sectors will slow the economy further this year but will not result in a collapse due to the massive government stimulus. China's real GDP growth has been on a downward trend ever since it peaked in Q2 2007 and is likely to decline further this year.

There are three main risks for the Chinese economy across the horizon: the credit risk, the housing bubble and another round of stock market turmoil. According to official figures, bad debt in Chinese banks climbed 51% in the past year to CNY1.27tn (USD195bn). This is the highest level since June-2006. Given the large state-owned banks’ corporate deposit holdings worth trillions of yuan, the debt is manageable. 

The slowdown in China worrying global investors is unlikely to result in a hard landing although high debt levels are a concern, said Fitch Ratings in a special report released on Wednesday. Fitch is still maintaining its stable outlook on China's credit rating for now, unlike peers Standard & Poor's and Moody's Investors Service who have lowered the outlook in recent weeks amid concerns over debt levels in the world's second-largest economy. Fitch expects China's economy to grow between 6 - 6.5 percent in 2016 and 2017. 

China's housing bubble is among the world's largest, with the average house price-to-income ratio estimated to be 17, much higher than the internationally recognised bubble threshold of 7. Despite that, China’s real estate market has ultimately maintained stability in the face of regular bouts of seemingly over-inflated prices because the central and local levels of governments are firmly at the helm. Also, Government intervention including net purchases by the state-owned investment funds has been able to keep the stock market stable in the past two months.

Chinese Premier Li Keqiang in his annual press conference in March allayed global concerns over the possibility of China's struggling economy heading for a "hard landing. He also played down concerns over financial risks faced by China, spiralling debts of the local government as well as falling profits of the Chinese banks. 

"Fitch Ratings believes strongly that China has the administrative and financial resources to avoid a disruptive slowdown to near-zero growth over the rating outlook horizon of about two years," rating agency Fitch said in an announcement.