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Saxo Bank: Chinese economy must transite towards demand-driven system

The consequence of these debt-fuelled investments into a ballooning stock market is now being felt in a very dramatic fashion

Baku. 9 July. REPORT.AZ/ We've long been sceptical about the Chinese economy’s potential and our below-consensus forecast for growth reflects these doubts. Amid the chaos now erupting in China one thing is absolutely clear - the Chinese economy must transition towards a more Western-style demand-driven system as it can no longer rely on investment-fuelled growth, Report informs, Ole Sloth Hansen, Head of Commodity Strategy at Saxo Bank says.

According to him, the return on investment in China has quite simply declined too much and more and more debt, both private and public, is needed to keep growth close to the official target. Our primary concern about the Chinese economy is that this rebalancing towards a more consumption-driven economy is happening too slowly. While this means less pain in the short term, as the economy can rely to a greater extent on investment, it pushes the day of reckoning into the future while the underlying problem just grows and grows.

"The recent central bank interventions – the Peoples Bank of China has cut the reserve requirement ratio for commercial banks if they meet some lending standards and it has cut the benchmark interest rate by 25 basis points – seem erratic considering the steady economic figures of late. This is particularly odd given the worries about debt-fuelled investments into the stock market", O.Hansen says.

The consequence of these debt-fuelled investments into a ballooning stock market is now being felt in a very dramatic fashion. Not only in China where millions of investors are now desperately trying to minimize losses by getting out of stocks. This selling, which turned into a stampede following the government’s initial failure to intervene at the weekend, has in just three weeks resulted in a 33% slide in the Shanghai Stock Exchange Index. 

"The China risks are a bit more upfront and a clear and present danger for Australia and other economies which are leveraged to commodity exports to China. So any financial stability risks in China could be felt far more rapidly, even on top of what we have already seen in terms of falling commodity prices. Iron ore, which is particularly dependent on Chinese growth, plunged 10% so far today – its lowest level since 2009 and possibly the biggest one-day fall in recent history. Over the course of the past week it has shed 25%", Saxo Bank official believes.

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