Daily Management Review

Morgan Stanley Says China Will Reach High Income Status And Avoid A Bank Crisis


02/15/2017




Morgan Stanley Says China Will Reach High Income Status And Avoid A Bank Crisis
A new Morgan Stanley report on the nation’s longer-term prospects titled "Why we are bullish on China" says that the country is likely avoid a financial crisis and is on track to reach high income status by 2027.
 
There has been growing concerns about the impact of a potential trade spat between China and the U.S., China’s surging debt levels and the slow pace of reforms and the sweeping outlook comes amid such growing concerns. The per capita incomes of Chinese people would reach $12,900 over the next decade from $8,100 now and this would be boosted by the country’s increasing shift into high value-added manufacturing and services that will play a central role, the analysts point while acknowledging those concerns as legitimate.
 
Morgan Stanley said that apart from only South Korea and Poland are the large economies with a population of over 20 million that has achieve that over the past three decades and China would be the third to do so if it manages to pull off that feat. Those with a gross national income of at least $12,476 per person are defined as high income economies  by the World Bank.
 
The positive signals for China are also noted in the report. According to Morgan Stanley, the way for new, high-value added industries in areas such as health care, education and environmental services would be cleared by proposed structural reforms such as the closure of uncompetitive state-owned enterprises and there is a growing rise in consumption and services which are increasingly powering growth. Hence a new generation of Chinese multinational corporations with significant presences both at home and abroad would be created.
 
At the same time, even though overall debt soared to 279 percent of the economy last year from 147 percent in 2007, the risk of a financial shock remains low. That’s because borrowing has been used for investment and has been funded by China’s own savings. According to the report, the absence of significant inflationary pressures that would destabilize the financial system, an ongoing current account surplus and high foreign reserves would provide a buffer along with strong net asset positions.
 
According to Morgan Stanley, though the currency will likely weaken further, a one-off devaluation of the yuan is also unlikely.
 
The analysts were also upbeat about the focus from stimulating the economy to reining in financial risk by China’s leadership.
 
"The most significant development on the policy front is that policy makers are now signaling 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, often with the use of investment of a low return nature," the analysts wrote.
 
However risks also loom large. The4 commitment to reshape state-owned enterprises and tackling the debt pile would be the key.
 
Although economic growth will compound at a much higher rate over coming years, it’s likely that China’s debt management will follow a path similar to Japan’s.
 
"With a starting point of lower debt, (China’s debt to GDP today is where Japan’s was in 1980) and per capita levels (China’s per capita GDP (PPP) today is where Japan’s was in the mid-80s)," the analysts wrote. "By not allowing for a sharp appreciation of its currency as Japan did after the Plaza Accord, China today is arguably better positioned to still achieve growth rates that can outpace global growth," says the report.
 
(Source:www.bloomberg.com) 






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