MOST global investors predict China will face a banking crisis within the next five years, paring their appetite for the country's shares, a Bloomberg Global Poll indicated.
Sixty-one percent of respondents said they anticipate a crash in the financial industry by late 2016, and only 10 percent were confident China's banks will escape trouble, according to the quarterly poll of 1,097 investors, analysts and traders who are Bloomberg subscribers conducted on December 5-6.
Evidence of slowing growth in China - including the weakest manufacturing performance in more than two years, falling home sales and ebbing export growth - has stoked concern that non-performing loans will climb in the world's second-largest economy. The risk is a legacy of a record 17.6-trillion yuan (US$2.8 trillion) lending boom unleashed by Premier Wen Jiabao in 2009-2010 amid the global recession.
"The deep-seated misallocation of resources, particularly in the real estate and banking sectors, will lead to a combination of political and economic instability," says Lance Depew, managing director of UPI Management LLC in Santa Barbara, California, and a participant in the poll.
The MSCI China/Financials Index of shares has tumbled 22 percent this year, underperforming the broader MSCI China Index of equities, which is down 17 percent. China Life Insurance Co has declined 32 percent and Bank of China Ltd 30 percent, contributing the most to the index's losses.
Enthusiasm for Chinese stocks has flagged among Bloomberg users. In the latest poll, 21 percent called China one of the best places to invest over the next year. That was less than half the 44 percent who named China in an October 2009 Bloomberg survey.
Thirty-five percent of respondents said they expect China's economic growth to slow to less than 5 percent from the 9.1 percent year-on-year pace recorded in the third quarter. Thirty-one percent anticipated "serious economic instability that stalls growth."
A plurality of 46 percent of investors described the Chinese economy as "deteriorating" - up from 38 percent in September - compared with 40 percent who said it was "stable."
The skepticism contrasts with the outlook of economists from Goldman Sachs Group Inc and the International Monetary Fund, who predict China will avoid a growth slump while defusing inflation. Goldman Sachs, in a December 1 report, projected the nation's gross domestic product will rise 8.6 percent next year and 8.7 percent in 2013.
A relatively low central government debt burden gives Premier Wen's administration the fiscal wherewithal to address a jump in non-performing loans. The IMF estimates the government's gross debt-to-GDP ratio at 27 percent this year, compared with 100 percent for the United States and 233 percent in Japan.
The World Bank said last month that while China faces the risk of a "strong" impact from a real-estate correction, it has "ample" scope to cushion its economy. Policy makers have begun responding to the signs of a weakening outlook, with the People's Bank of China last week lowering banks' reserve requirements for the first time since 2008 to encourage lending.
"China, simply put, is the best managed major economy on the planet," said Anthony Stephens, an equity trader with Standard Chartered Bank in Hong Kong.
Most investors in the poll don't anticipate China's relative economic performance translating into broader influence that would displace the US as the world's preeminent superpower.
Forty-one percent of poll respondents said that the US would remain militarily dominant even as the Chinese economy eventually overtakes it in size. An additional 27 percent said China would "never surpass" the US as the top global force. Only 25 percent agreed that China would "inevitably replace" it as the No. 1 superpower.
President Barack Obama's administration has sought to enhance the US's stature in Asia this year, an initiative Secretary of State Hillary Clinton has described as a "pivot" toward the region after a decade of American focus on war in the Middle East. As part of the approach, the administration is seeking a free-trade agreement with Pacific nations, including Malaysia, Vietnam and Singapore, and last month enhanced its security ties with Australia.
Global investors are skeptical about the US effort, highlighted when Obama hosted the annual 21-nation Asia-Pacific Economic Cooperation summit in Honolulu last month and attended an East Asia Summit in Bali, Indonesia. Fifty-six percent said the campaign "will not enhance US influence and end up antagonizing China," compared with 30 percent who expect it to serve as an "effective counterweight" to Chinese power.