China’s massive levels of debt will cause an economic slowdown over the next two years, according to an influential ratings agency.
The pursuit of “policy settings that prioritise short-term growth targets” could leave the world’s second-largest economy vulnerable to a slowdown next year, according to Fitch.
The agency predicts growth will slow to 6.4 per cent in 2017 and 5.7 per cent next year, both well below growth of 6.7 per cent for 2016.
While 2016 growth was squarely within the growth target of 6.5 to seven per cent set by the Chinese government, it was also the lowest annual rate since 1990.
Fitch’s analysis highlights the divergence between low investment levels from private enterprises compared to state-owned enterprises, which saw investment growth boom to 19.1 per cent over the last year, up from 10.7 per cent in 2015.
Lower private investment levels may indicate the Chinese economy lacks “self-sustaining growth momentum” and is relying on stimulative debt to pursue growth, according to Fitch.
A slowdown in Chinese growth would cause concerns in markets around the world. However, the extent of investor concern will depend to a certain extent on how well China's government manages a slowing growth rate.
At a recent annual meeting of China's economic leaders policymakers started addressing a possible slowdown, according to Ed Smith, an economist at Rathbones.
"There was quite a clear shift in tone to emphasising reducing financial risk and accelerating structural reform," he said.
This echoes warnings from prominent economists of the risks China’s debt levels pose to the world economy. In November Bank of England governor Mark Carney highlighted Chinese over-indebtedness as one of the biggest risks to the UK’s financial system.
The warnings come at the start of a new era in the relationship between China and the rest of the world, with US President Donald Trump threatening to start a trade war with the nation.
The ratings agency reaffirmed China’s sovereign rating at A+ in November, with an outlook suggesting there would be no change in the coming year. However, fears of an economic slowdown could put that stable outlook at risk.
Ratings, which try to take default risk into account, can have an important effect on what debt major institutional investors such as pension funds can hold.