ESE President Xi’s strategy of slower economic growth could be “lethal” for the country’s financial system, according to a report from Bank of America Merrill Lynch (BoAML).
Analysts at the bank said they expect the Chinese market to be “choppy” in 2015, and warned of a heightened debt default risk. It also cautioned investors to focus on risks of deflation and renminbi devaluation.
The Hang Seng is predicted to decline by 10 per cent by the end of this year “even without factoring in a credit crunch”, according to BoAML’s report, entitled Deflation, Devaluation and Default.
It added that China’s export was under pressure and said the People’s Bank of China might need to cut rates to help growth at some point. And with cross-border capital flow becoming “increasingly easy”, the report cautioned that the government may allow the renminbi to fluctuate more.
The report also stated that China’s shadow banking sector is “largely built on implicit guarantees and any meaningful defaults there may jeopardise financial system stability”.