China: The Year of Living Dangerously: What's Next? - Credit Suisse

Our central scenario remains for a further controlled moderation in Chinese growth this year; however, we think that the risk of a more severe correction has grown substantially, as the effectiveness of the export/investment/creditintensive growth model is increasingly brought into question (both by markets and domestic policy makers).

These challenges have been amplified by the market’s perception that the Chinese authorities risk “losing control” of the economy, with recent changes to the exchange rate and the domestic equity market policies increasing the nervousness. 

We believe that even under our central scenario of a controlled slowdown, many China-related assets will remain under pressure, with the occasional inevitable data undershoot or Chinese policy change likely to lead to periods of heightened volatility. The risk of contagion to other markets has been exacerbated by concerns about the strength of non-China global growth, with stresses in US credit markets and, more recently, global equity markets adding to the negative sentiment.

If the downside risks to Chinese production and investment were to occur, there would be substantial implications across the investable universe, with the economic impact likely to see a pause in the Fed tightening cycle, among other things.