China faces increasing challenges in maintaining its above-average growth rates, according to a BlackRock Inc. report.
“China's old playbook of "invest and grow' no longer works so well,” BlackRock analysts wrote in a report that the money manager released last Tuesday. China has to deal with unbridled credit growth, overbuilding and income inequality, according to the report.
The country “has been on an extraordinary [growth] path,” Jeff Shen, BlackRock's head of Asia-Pacific and emerging-markets equity, said in an interview.
Expansion will continue but “perhaps at a more moderate pace,” going from double-digit growth rates to about 7.5%, he said.
China's growth has been dependent on subsidized credit and low wages, according to the report.
A needed shift to a more consumption-driven society, where savers are rewarded and workers can consume more, could be hamstrung by political hurdles.
China will shuffle the powerful Standing Committee of the Politburo this fall. But one prominent candidate, Chongqing Communist Party leader Bo Xilai, has been ousted from power due to a murder investigation involving his wife, throwing the process into turmoil.
But the biggest long-term threat remains the financial sector, still suffering from the explosion in credit growth resulting from Beijing's 2009 stimulus, according to BlackRock.
A government-engineered slowdown has created ghost towns in some areas and an implosion in the construction-related sectors.
“The question now is: Can Beijing break a vicious cycle of falling prices and sales” in the real estate sector, BlackRock said.
“I think certainly there's going to be a bit more volatile path ahead,” Mr. Shen said. “There's been a ... credit binge in 2009, the real estate bubble is bursting, especially in coastal areas, the export engine is facing uncertain demand globally [and] the political transition will not be as smooth as expected.”
Global consumer companies and high-end machinery makers are likely to be the best long-term bets in China, BlackRock concluded, while basic-materials companies “are likely to suffer as China hits the ceiling for cement and steel consumption.”