China at doorstep of crisis, says Bank of America

A financial crisis may happen in China at any time because of the nation's debt woes, according to Bank of America, while BlackRock'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 stabilised since sinking to a five-year low in July, ahead of its addition to the International Monetary Fund's reserves basket on October 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 per cent in 2020 from 261 per cent in the first half of this year, according to CLSA. 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.

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, 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."

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Bloomberg