Emerging Markets Weekly Economic Briefing: 19 Apr 2013

We expect China's GDP growth to pick up this year and next, bringing with it some additional risks. Parts of the property market are beginning to heat up again, raising the possibility of a housing bubble, and the shadow banking sector also appears to be growing rapidly. This little-understood sector (accurate data are hard to come by) is a threat in part because it may obscure high levels of non-performing loans. Off-balance sheet wealth management is growing fast. Total social finance, which covers bank lending and other sources of finance, amounted to well over twice China's entire GDP last year. This is a substantial increase from 125% ten years ago. Access to credit is of course necessary to secure growth, but unregulated sources also increase financial risks. The authorities are not ignorant of the risks associated with the rapid growth of shadow banking, however, so we would expect to see greater vigilance of the sector's development as well as increased regulation. While we do not think the authorities will clamp down at this stage, high debt levels remain a significant risk to our forecast.