China Rising risks of financial crisis.pdfVIP

Asia Special Report NOMURA GLOBAL ECONOMICS N O M U R A I N T E R N A T I O N A L H O N G K O N G L I M I T E D China: Rising risks of financial crisis ? China is displaying the same three symptoms that Japan, the US 15 March 2013 and parts of Europe all showed before suffering financial crises: a rapid build-up of leverage, elevated property prices and a Authors decline in potential growth. Economists, Asia ex-Japan ? We delve into the financial risks facing China’s economy and find Zhiwei Zhang that the most vulnerable areas are local government financing zhiwei.zhang@ +852 2536 7433 vehicles, property developers, trust companies and credit Wendy Chen guarantee companies. We also show how they are interlinked. wendy.chen@ +86 21 6193 7237 ? If the government acts this year with tighter policies – and our base case is that it will – we believe it can still avoid a systemic FX and Rates Strategists, Asia ex-Japan financial crisis. But that would come at a short-term cost of slower GDP growth, which we expect to average 7.3% in H2 2013. Craig Chan craig.chan@ See Appendix A-1 for analyst +65 6433 6106 ? As history has repeatedly shown, the slower the policy response certification, important Prateek Gupta to financial excesses, the greater the risk of a systemic financial prateek.gupta@ disclosures and the status of crisis and the more challenging it will be to avoid a hard economic +65 6433 6197 non-US analysts. landing. Vivek Rajpal vivek.rajpal@ +91 22 4037 4438 Prateek Gupta prateek.gupta@ +65 6433 6197 Wee Choon Teo weechoon.teo@ +65 6433 6107 Nomura Nomura | Asia Special Report 15 March 2013 Contents Introduction 3 Symptoms of financial risks 4 1. Rapid build-up of leverage 4 2. Rapid asset price inflation 9 3. Decline of potential growth 11 Identifying the risks 15 Government finances 15 Financial sector conditions 17 Household sector 21 Corporate sector 21 The linkage of risks and moral hazard 22 Endgame: Base case and risk scenario 23 Base case 2