China: Rising risks of financial crisis

Asia Special Report: China: Rising risks of financial crisis

· China is displaying the same three symptoms that Japan, the US and parts of Europe all showed before suffering financial crises: a rapid build-up of leverage, elevated property prices and a decline in potential growth.

· We delve into the financial risks facing China’s economy and find that the most vulnerable areas are local government financing vehicles, property developers, trust companies and credit guarantee companies. We also show how they are interlinked.

· If the government acts this year with tighter policies – and our base case is that it will – we believe it can still avoid a systemic financial crisis. But that would come at a short-term cost of slower GDP growth, which we expect to average 7.3% in H2 2013.

· As history has repeatedly shown, the slower the policy response to financial excesses, the greater the risk of a systemic financial crisis and the more challenging it will be to avoid a hard economic landing.

Zhiwei Zhang