China's Economic Transformation Boosts Credit Outlook
We believe China's risks for a hard landing have decreased due to a confluence of positive forces. Our optimism is driven by better quality economic growth involving an increased role for the private sector and effective shadow banking regulation.
With a growth model heavily reliant on investment in recent years, China's risks for a hard landing are well known. For U.S. investors, much is at stake. China is one of the most important earnings growth drivers for many U.S. multinational companies, and it accounts for about a third of global GDP growth. A weaker China would reduce global aggregate demand significantly and hurt many of its trading partners. Thus, a hard landing represents a key global tail risk that might trigger a global recession. We see a confluence of positive forces that tell us the risk of a hard landing has decreased, due to lower risk of a credit event in China. This lower risk stems from better internal and external growth involving more consumption and an increased role for the private sector as well as effective regulation aimed at the shadow banking activities.