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JPMorgan explains what's driving China's growth

  • Consumption and innovation will be the two major growth drivers in China, JPMorgan Chase said
  • In the next three years, China's consumption will grow from the current $4 trillion to $6 trillion, the bank said
  • The Chinese government is not only encouraging tech companies to go abroad, but is also urging old industries to adopt innovation

Consumption and innovation will be the two major growth drivers in China in the years ahead as the economic giant moves into its next phase of expansion, a JPMorgan Chase expert said Thursday.

In the next three years, China's consumption will grow from the current $4 trillion to $6 trillion — an addition that is roughly equivalent to the size of Germany's consumer market, said Jing Ulrich, JPMorgan Chase's managing director and vice chairman of Asia Pacific.

On innovation, the Chinese government is not only encouraging technology companies to go abroad, but also urging old industries such as manufacturing to adopt new ways of doing business. That will lift the country's growth prospects, added Ulrich, who is a well-known expert on the world's second-largest economy.

Speaking from the sidelines of the Fortune Global Forum in Guangzhou, China, Ulrich highlighted China's newest inventions: "China's payments system is number one in the world in terms of size and sophistication, and also the sharing economy. So we're really seeing innovation taking hold in the whole economy."

Chinese steel companies are a key source of risky debt.
Kevin Frayer | Getty Images
Chinese steel companies are a key source of risky debt.

Many Chinese tech companies are "planting seeds" in Southeast Asia and North Asia, and Ulrich said she expects more to venture abroad.

China's economic growth has largely surpassed expectations this year, helped by a global recovery in exports. That has boosted corporate earnings and allowed the country to cut financial leverage, which has been a key source of concern among investors.

An increasing number companies in the troubled steel industry, a major source of risky debt in the Chinese economy, are profitable now, Ulrich said. She noted that 85 percent of steel companies are making money today, compared to just 5 percent two years ago.

"For the first time since the financial crisis, financial leverage in China is coming down because corporates, the heavy borrowers from banks, are finally making a lot of money," she said.

"So they're paying down some of their debt, and, as a result, we're seeing leverage ratio coming down. Having said that, many Chinese banks have grown so rapidly therefore as you grow, as you lend, you need more capital. So I think for the smaller banks, in particular, they need to replenish their capital position before they can grow into the new year," added Ulrich.

The International Monetary Fund on Thursday morning released its assessment of the Chinese financial system. It said a stress test of 33 banks, which account for three quarters of total banking assets, revealed that 27 of them were under-capitalized.