In Standard Life Investments’ Global Perspective report, the firm stated that this rebalancing will likely lead to further growth downgrades for the country.
Following the 2008 global financial crisis (GFC), China implemented a massive stimulus package that boosted the investment to GDP ratio from 39 per cent in 2007 to 47 per cent in 2012. A significant portion of this extra capital was allocated to infrastructure, the asset management firm pointed out.
Not all this capital was allocated efficiently, and this is compounded by the opacity of the Chinese banking and financial system, Standard Life Investments stated.
“The growth model that has served China so well over the past two decades is certainly breaking down and there is more uncertainty that the improvement in employment prospects and real incomes that have been promised will ultimately come through,” Jeremy Lawson, senior international economist of Standard Life Investments said.
The Beijing government, according to the asset management firm, is aware of the need to rebalance the economy away from investment towards consumption-led growth.
“The investment that does take place needs to be more productive and less politically driven ... [and] the financial system needs to be overhauled so that bank balance sheets are cleaned up,” the report stated.
Standard Life’s house view is that financial markets have already priced in much of the bad news. However, investors must still keep an eye on structural reforms that are to be announced at the Chinese Communist party’s autumn conferences.
“A cautious approach to reform may help prop up growth in the very near term, but it would probably come at the cost of making internal imbalances worse, and thus the eventual unwind more economically and socially disruptive,” Standard Life stated.
