Out from the shadows
In terms of outlook, Asian equity markets are likely to remain volatile owing to concerns over global economic growth, continued US dollar strength and a slowdown in China, where worries over the country’s rapid credit expansion, shadow financing and industrial overcapacity remain. Since 2008, total debt in China across government, households and private enterprise has risen 118% from 135% of GDP to 254%. China’s ‘shadow banking system’ has grown almost 25% per year since 2009. In mid-June, the IMF warned that Chinese corporate debt – which totals about 145% of GDP in absolute terms – is rapidly growing, and it urged China to implement immediate reforms to address it. That said, much of this debt is held by Chinese state-owned enterprises.
Most commentators believe, however, that investor fears about Chinese debt and a credit crisis may have been exaggerated. In addition, steadier economic activity has eased fears of a hard landing. While debt levels are high and recent rates of growth are unsustainable, China’s debt, as a percentage of GDP, is lower than in developed markets, including the US and Europe.
Another positive is the unique positioning of China’s foreign reserves, which seem to have hovered around the $3.2trn mark for the seventh consecutive month (down from $4trn in June 2014), which is positive news given the continued speculation about a further currency depreciation.
Many economists forecast China’s GDP growth for 2016 and beyond to remain below the 7% mark as the economy undergoes a major transformation to even out imbalances built during the boom years.
