Bank of America Sees China Crisis, BlackRock Only Bumps in Road

  • Bulls, bears speak on panel at conference in Hong Kong
  • Views differ on how much room Chinese government has to move

Are There Opportunities in China's Debt?

A financial crisis may happen in China at any time because of the nation’s debt woes, according to Bank of America Corp., while BlackRock Inc.’s head of Chinese equities said the government has room to move and cautioned only of financial “bumps along the way.”

David Cui, Bank of America Merrill Lynch’s head of China equity strategy, and Helen Zhu of BlackRock were among speakers at the Bloomberg Markets Most Influential conference in Hong Kong on Wednesday. The session gave a snapshot of views on the risks posed by China’s explosive debt growth since the global financial crisis.

While Cui didn’t argue that a crisis was imminent, he said that it could happen at “any time”and seemed to be inevitable, because it was almost impossible for China to grow out of its debt problem. While the government has the resources to support the yuan for the next year or so, a “huge” one-off devaluation may follow a decline in the nation’s foreign-exchange reserves, he said. The yuan has stabilized since sinking to a five-year low in July, ahead of its addition to the International Monetary Fund’s reserves basket on Oct. 1.

Zhu said she was a bull and that China wouldn’t have the imminent hard landing that “so many people have been waiting so many years for.”

The pace of a build-up in leverage had slowed in recent years and “perhaps in three to five years time, we can then think about a stable leverage and eventually a deleveraging,” Zhu said. In another promising sign, the nation had also started the long and painful process of shifting credit away from the likes of “zombie” state-owned enterprises to more productive enterprises, she said.

China’s debt-to-gross domestic product ratio may blow out to 321 percent in 2020 from 261 percent in the first half of this year, according to CLSA Ltd. The Basel-based Bank for International Settlements said earlier this month that a warning indicator for the nation’s banking stress has risen to a record.

To read about the banking stress indicator, click here.

While the government needs to move urgently in areas including the restructuring and refinancing of debt, it hasn’t run out of time yet, Zhu argued. The “bumps along the way” could include trust and corporate-bond defaults as implicit guarantees disappear, leading to increased funding costs for some companies, she said.

At the same conference, David Bloom, the global head of currency strategy at HSBC Holdings Plc, said he was tired of hearing predictions that there would be a sudden fall in the yuan. The currency “is going to sell off very slowly,” he said. “You want a painful slow trade, go for it.”

— With assistance by Justina Lee

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