Global Economic Climate-China’s Perspective * Chinese Stocks Have Further To Fall * Negative wealth effect on Chinese households * Financing Channels Now Closed * Property Market Stability At Risk * Renewed stability in the property market in the past * The weakening stock market reflects poor incomes and housing affordability * Banks become increasingly risk averse * Recession And/ Or Financial Crisis Risks Growing * Economic growth structure too reliable on debt * Excess Capacity of Manufacturing industry * Chinese demand is underperforming the bullish expectations

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With the Chinese equity bubble finally bursting in line with our expectations and likely to continue declining much further from still-extreme valuations, we are assessing the potential for either a recession or a financial crisis, which we believe are growing risks.

* Chinese Stocks Have Further To Fall * Negative wealth effect on Chinese households * Financing Channels Now Closed

* Property Market Recovery At Risk * Renewed stability in the property market in the past * The weakening stock market reflects poor incomes and housing affordability * Banks become increasingly risk averse
Given that the property market and the upstream industries supplying it (cement, metal etc) accounts for almost 30% of GDP, and property and land prices are a major source of loan collateral, the housing market remains a crucial factor in China's economy.
It has been argued by some that a fall in the value of the stock market could trigger a rush into property much in the same way as the weakness of the property market was considered a factor in encouraging investors into the equity market. In our view this is overly optimistic.
Firstly, the weakening stock market reflects the underlying weakness in the economy, which bodes预示 very poorly for incomes and housing affordability.
Secondly, banks may become increasingly risk averse following the collapse in equity valuations, and may be reluctant to expand mortgage lending under a sharply slowing economy. * Recession And/Or Financial Crisis Risks Growing (7% or lower) * Economic growth structure too reliable on debt * Excess Capacity of Manufacturing industry * Chinese demand is underperforming the bullish expectations * A rapid build-up in China's debt-to-GDP ratio is a major warning signal for future growth and financial stability. As we have argued several times previously,. Indeed, not only is the pace of economy-wide debt-to-GDP the single most important predictive factor in causing financial crises, but in the case of China, this debt has often been accumulated without hard budget constraints in place to ensure profitability. * A cursory look around global commodity markets reveals the extent to which Chinese demand is underperforming the bullish expectations help by commodity investors over recent years. However, the Chinese economy is still growing. In volume terms, iron ore and oil imports are still in positive territory in smoothed year-on-year terms, while its nominal exports continue to expand. This begs the question of what the global ramifications could be of an outright China recession and/or financial crisis. * There is nothing special about China's growth model that makes it immune from outright recession. That is not to say that we expect this to happen (and we certainly do not expect the government to report such an occurrence), but even after collapses in commodity prices, the risks still appear to be underappreciated by analysts and investors.