China’s Debt Pain Will Spur Long-Run GDP Gain, Morgan Stanley Says

The unprecedented deleveraging that’s rippling through China’s economy likely spells moderation for economic growth, consumption and investment, Morgan Stanley says.

But short-term pain will spur long-term economic gain, and risk of a big growth correction will be low, chief China economist Robin Xing said in a note Thursday.

“Growth quality will improve,” Hong Kong-based Xing wrote. Lower government and household debt ratios “could prevent excessive leverage build-up among local government and households, help overall debt-to-GDP reach near-stabilization by the second half of 2019, and ensure a healthy transition to a consumption-led economy in the long run.”

Xing said that more intense deleveraging, with regulators taking steps like banning shadow-bank financing for local government infrastructure projects, reaffirms his forecast that growth will moderate from 6.9 percent in 2017 to 6.5 percent this year. That’s in line with the median estimate in Bloomberg’s survey of economists.

Policy makers will be especially attuned to growth impacts of policy tightening and potential spillovers from external risk, and will fine-tune the pace of deleveraging if needed, Xing said.

Morgan Stanley also projects slower broad credit and investment growth this year, with tighter scrutiny of local government financing likely to cut the pace of transport infrastructure investment growth by more than half, to 7 percent.
Source: Bloomberg