Recent positive data from China may have allayed some doubts about the state of the economy, but PNC Financial Services Group is staying cautious, warning of a "perfect storm" that could surface in two years' time.
"Several problems long on China's back burner are likely to come to a head by 2016," Stuart Hoffman, chief economist at Financial Services Group wrote in a report this week, citing challenges including a weakening credit market, a slowdown in corporate reinvestment of earnings and a correction in the all-important housing market.
These headwinds could slow Chinese real GDP (gross domestic product) growth to around 6.0 percent in 2016, the slowest since 1990, the firm noted.
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China's economy expanded 7.5 percent in the second quarter, a touch above expectations of and rising from 7.4 percent in the first three months of the year, as the government's targeted stimulus measures began to pay off.
The so-called perfect storm could unfold with a dramatic slowdown in the flow of credit for investment, especially from non-traditional lenders like trust companies, as corporate credit quality deteriorates, the report said.
"If trust credit does indeed dry up, Chinese borrowers will struggle to roll over their loans and could be pushed into default, throwing even more sand into the gears of financial intermediation," Hoffman said.
Reduced credit would then reinforce a sharp slowdown in capital expenditures, PNC said, noting that spending in labor-intensive manufacturing sector has already slowed amid rising labor costs and an appreciating currency.
"And Chinese private businesses with idle funds are unable to invest in more attractive opportunities in the domestically-oriented service sector [because] regulatory barriers protect state-owned business from private competition," he added.
Housing sector on shaky ground
Any major correction in the country's housing market, an important pillar of the economy which affects more than 40 other sectors, could exacerbate events, PNC adds.