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China’s economy returned to an old growth pattern — credit-driven, investment-intensive — in the last few months.

Analysts now ask if the authorities have been clear enough about their reform policies, given the risks to the Chinese economy that grew 6.9 per cent in 2015, the slowest pace in 25 years.

“I am deeply worried about the Chinese economy in the medium- and long-run and do not see a way out,” Vincent Chan, head of China research at Credit Suisse, said. That’s despite recent stimuli to the property market, he said.

He is “most bearish” on China’s outlook for getting out of debt.

“We have to watch this leadership — inventing so many economic reform terms, from “Likonomics” and “supply side reform,” Chan said. “The effect is limited in addressing the problems of overcapacity and ratcheting up debt.”

Imminent risks for China are manageable, because the economy is now “financially solid”, but weaknesses may build, Chan said.

Chinese authorities have eased credit regulations, lowered down payment requirements and cut taxes. Two-thirds of the 70 major Chinese cities said new home-price rose in February. While the floor space of houses newly started is still below the amount sold, indicating developers are becoming more prudent in their market outlook.

Chinese manufacturing expanded for the first time in nine months in March. The official manufacturing purchasing managers’ index rose to 50.2 last month from 49 in February. A figure over 50 shows growth, below that level, contraction.

The Shanghai Composite Index, the mainland stock benchmark surpassed its crucial 3,000-point level as investor sentiment warmed. It traded at 3,056.77 on Wednesday morning, almost 15 per cent up from a recent low in late February of 2,673.11.

Chan said the A-share-market rebound might last another one or two months, as global equity markets pick up and the appetite for risk rises. The fundamental change in the macro-economic outlook could prove a stumbling block, he said.

Also on the downside, rating agencies Moody’s and Standard & Poors (S&P) revised the Chinese government’s credit rating to “negative” from “stable” last month.

An investor smiles as he looks at an electronic board showing stock information at a brokerage house in Nanjing, Jiangsu province, December 17, 2015. REUTERS/China Daily

“The government is making significant reforms,” S&P analysts said in a note. Still, a “negative outlook is partly motivated by our opinion that the pace and depth of the state-owned enterprise (SOE) reform may be insufficient to attenuate the risks of credit-fueled growth.”

Fitch Ratings kept China’s sovereign rating “stable.

It did express concern for the county’s growing debt ratio and drew skepticism over its reforms in a note sent on Tuesday.

“Elements of a policy on addressing over-capacity in certain sectors have been articulated — particularly coal and steel — but they do not add up to a convincing strategy, given the scale of the issue,” Fitch analysts said in the note. “Financial reforms, such as deposit interest-rate liberalization in November 2015, have been undercut by monetary easing that has kept the system flooded with credit.”

“The authorities’ 2016 policy targets imply that the economy will grow more leveraged, with a 13 per cent aggregate financing growth against an implied nominal GDP growth target in the single digits. Much of the detail remains to be filled in, even three years into the current top leadership’s term of office,” Fitch analysts said in the note.

Increasing debt has overrun and will outpace China’s economic growth. Unless those in power push large-scale debt restructuring, that trend will continue, Chan said.

“Total borrowing will rise to 300 per cent of the GDP before 2020, from the current 250 per cent level,” Chan said. “Historically speaking, economic growth halts when the debt ratio climbs that high.”

Goldman Sachs economists shared that view. They said in a recent research note that near-term credit risks in China were manageable. Medium-term challenges remain, they said.

“The government for the first time set a total social financing target of 13 per cent for 2016, meaning that credit growth will likely continue at a pace above nominal GDP growth,” the report said. “Our China banks team recently revised their estimate on potential non-performing loans in the banking sector to 8-9 per cent, compared to our previous estimate of 4-6 per cent and 1.7 per cent reported NPLs at the end of 2015.”

Credit Suisse’s Chan said the most straight-forward solution for China was to accept economic growth will slow to 2 or 3 per cent compared with the double-digit expansion of previous years and that it must adopt drastic restructuring. Politically that is impossible, he said.

“Hopefully the new-economy segment, which is thriving in cities like Shenzhen and Beijing, could offset the weakening in the traditional economic sectors,” Chan said. “Sadly this sector remains so underrepresented in the A and H share markets.”

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