Deutsche Bank has said that China could be the source of the next financial crash
Strategists at the German bank have indicated China could be the trigger for the next economic downturn as the country’s “fundamental vulnerabilities” remain.
Research by the bank’s strategists Jim Reid, Nick Burns, Sukanto Chanda and Craig Nicol found China still needs to reposition its economy “from manufacturing to services and investment to consumption.”
But in a report, Deutsche Bank also warned this move needed “to take place in the context of also containing the rapid growth of credit in our view.”
The report said: “Rapid credit expansion due to an insatiable demand for debt fuelled growth, compounded by a hugely active shadow banking system, as well as an ever expanding property bubble fuelled fears for economists that China could inevitably make a hard landing and send shockwaves through the world’s financial markets. However, the economy has seemingly defied the odds.”
“However, future growth cannot forever rely on debt and investment alone…The warning signs are there and the fundamental vulnerabilities remain. The greater issue might be ‘when’ rather than ‘if’ the credit bubble pops.”
The strategists examined the possible areas that could trigger the next financial crisis, saying they were highlighting possible areas of concern.
It comes after the European Union Chamber of Commerce said China needed to carry out promises to open its economy and warned inaction might fuel a backlash against free trade.
The Chamber said Beijing was backtracking in some areas including by imposing new restrictions on food imports, express delivery and legal services. It proposed hundreds of possible changes to open the state-dominated economy wider or simplify rules in fields from cosmetics to medical devices.
Chamber president Mats Harborn said: “The current lack of reciprocity in market access is becoming politically unsustainable.
“We are worried that if this is not quickly changed, there will be a backlash against economic globalisation.”
Deutsche Bank also highlighted a number of other areas that could be cause for concern for the global economy.
The possibility of Brexit “going wrong” was also viewed as a worry but analysts saw the ongoing negotiations as a “complicated issue with many potential outcomes over the years ahead.”
Deutsche Bank said that China needed to focus its economy on investment and consumption
Deutsche Bank said: “Ultimately our expectation is that compromise will be reached and the UK and EU will establish a new relationship. However in this uncertain world the vote to leave in June 2016 throws up a potential crisis if negotiations completely break down.
“Through most of history, we tend to think compromise is always the most likely outcome when such differences exist and where there is the chance of mutually assured destruction.
“The extreme example being World War Two when no-one really expected war, weeks and months before it arrived. How spectacularly wrong that assumption was. So it’s worth highlighting how Brexit could go wrong and create a financial crisis,”
Over the issue of quantitative easing programmes, or as the bank called it the “Great Unwind”, it was a ”journey into the unknown.”
Deutsche Bank chief executive John Cryan
The strategists warned “history would suggest there will be substantial consequences of the move especially given the elevated level of many global asset prices” adding “even if the unwind stalls as either central banks get cold feet or if the economy unexpectedly weakens, we will still be left with an unprecedented global situation and one which makes finance inherently unstable.”
Japan also posed problems for the future with the country facing a financial and demographic problem.
Deutsche Bank said: “Japan continues to face the challenge of trying to manage large budget deficits, large QE and the highest public debt ratio in the developed world at a time when the population is falling and ageing, with obviously fewer and fewer workers to pay the bills and more and more elderly to try to support.
“Stubbornly low inflation hasn’t disappeared despite the odd green shoot emerging and growth, while showing some signs of stabilising, in absolute terms continues to make slow progress. All of these issues make Japan a still very relevant story.”