China will likely avoid financial crisis: Morgan Stanley

Morgan Stanley forecasts an average of 4.6 per cent growth between 2021 and 2025, less than half the past three decades' average growth rate of 9.6 per cent.
Morgan Stanley forecasts an average of 4.6 per cent growth between 2021 and 2025, less than half the past three decades' average growth rate of 9.6 per cent.PHOTO: REUTERS

BEIJING • China will likely avoid a financial crisis and is on track to reach high-income status by 2027, according to a new Morgan Stanley report on the nation's long-term prospects.

The outlook comes amid growing concern over China's surging debt levels, its slow pace of reform and the impact of a potential trade spat with the United States.

While acknowledging those concerns as legitimate, the analysts point to the country's increasing shift into high value-added manufacturing and services, which will play a central role in boosting per capita incomes to US$12,900 (S$18,350) over the next decade, up from US$8,100 now. 

If China succeeds, it would join South Korea and Poland as the only large economies with a population of more than 20 million to achieve that feat over the past three decades, Morgan Stanley said.

There are other positives. Consumption and services are increasingly powering growth, while proposed structural reforms, such as the closure of uncompetitive state- owned, enterprises will clear the way for new, high value-added industries in areas such as healthcare, education and environmental services, according to Morgan Stanley.

That would spur the creation of a new generation of Chinese multinational corporations, with significant presences both at home and abroad.

The risk of a financial shock remains low - even though overall debt soared to 279 per cent of the economy last year, from 147 per cent in 2007 - because borrowing has been funded by China's own savings and used for investment.

Strong net asset positions provide a buffer, along with an ongoing current account surplus, high foreign reserves and the absence of significant inflationary pressures that would destabilise the financial system, according to the report.

A one-off devaluation of the yuan is also unlikely, though the currency will likely weaken further.

The analysts wrote: "The most significant development on the policy front is that policymakers are now signalling a willingness to accept slower rates of growth, and place more focus on preventing financial risks and asset bubbles, indicating that they would not protect growth at all costs."

Still, much will depend on China's commitment to tackling the debt pile and reshaping state-owned enterprises.

Morgan Stanley forecasts an average of 4.6 per cent growth between 2021 and 2025, less than half the past three decades' average growth rate of 9.6 per cent.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on February 15, 2017, with the headline 'China will likely avoid financial crisis: Morgan Stanley'. Print Edition | Subscribe