ODT senior business reporter Simon Hartley reviews reports by broker Forsyth Barr and international rating agency Standard and Poor's on the state of the Asia Pacific region and the challenges facing China.
China's influence now reaches virtually every facet of New Zealand's economy, from forestry, agriculture and dairying to tourism and retail.
Most reports on the Chinese economy focus mainly on its appetite for imports or strength based on export led growth.
Reports released this week by brokerage Forsyth Barr and international rating agency.
However, Standard and Poor's (S&P) also highlights the level of indebtedness of hundreds of thousands of Chinese companies, indebtedness which is eight times greater than that of the Chinese Government.
The past four years have seen a spike in Chinese corporate debt, including that of its state owned enterprises (SOEs), which had doubled to 160% of its gross domestic product (GDP) by the end of last year.
Neither report specifically focuses on last week's sharemarket rout.
However, S&P noted the Chinese market ''turmoil'' was a reminder that ''significant regulatory imbalances'' remained in China, in particular, in the intertwining of policy and agenda when dealing with market irregularities.
Forsyth Barr broker Suzanne Kinnaird, from research presenting an ''economic snapshot of China'', said while Chinese growth picked up in the quarter to June, the ''bursting stock market bubble'' was likely to be a setback for Beijing.
The Chinese Government was hoping stock market gains would ''ripple through the economy'', assisting authorities to improve the financial health of the debt laden SOEs - of which there were more than 100,000, she said.
''Falling equity prices negates the ability of companies to swap their debt for equity, or fund mergers and acquisition activities,'' she said.
S&P's Asia Pacific Credit Outlook report, a forecast of the third quarter of this year, has downgraded near term risks for most Chinese industries, as corporate credit growth slows and ''stabilises''.
''China is beginning to settle down to a lower and more sustainable economic growth strategy, with the rest of the [Asia Pacific] region adjusting to this new normal,'' the report said.
However, downgrades remained likely in several sectors which had benefited from the recent ''boom times'', in particular financial institutions, the real estate sector and natural resources industries.
''We expect more defaults to occur - a lag effect from the fast credit expansion of recent years,'' the researchers said.
Similarly, Ms Kinnaird said negative risks for China included a ''hard landing'' for its housing market and credit related defaults and bankruptcies.
S&P said while the magnitude of defaults was not likely to present a serious systemic threat to the Asia Pacific region, four factors could yet trigger an ''unexpected shock'' - the high indebtedness of Chinese companies, Japanese government debt, Australian household debt and Korean companies' debt.
''Out of our four longstanding risks, the high debt load of China's corporate sector is our top concern,'' the S&P report said.
Ms Kinnaird said China had the ''competing priorities'' of needing to ease monetary policy much more, in order to boost corporate profitability, and the need to curb more debt fuelled growth.
''China is struggling to curb excessive debt growth. Those [competing priorities] underline the challenge Beijing faces as the slow transition in the economy grinds on,'' she said.
She noted China's debt to GDP ratio had increased 40% since 2011, during which time producer prices had been falling.
''When debt levels stabilise, deflationary forces will more likely intensify,'' she said.
The S&P report said while China's enormous expansion during the past five years was common knowledge, it was ''less appreciated'' that it was corporate debt that had been fuelling the growth.
''Corporate debt in China is about eight times the size of the Government's,'' the researchers said.
''Partially tempering the Chinese companies' huge debt burden is low sovereign borrowing,'' the S&P report said.
Also, the Chinese Government had strong control over SOE banks and influence over other SOEs, which were principal players in several industries, the S&P report said.
Ms Kinnaird said China's recent data on second quarter GDP, which was up 7% year on year and ahead of forecasts, also included ''upside surprises'' for industrial production and retail sales.
However, it was too soon to call for meaningful acceleration in real GDP growth given the artificially high exchange rate and increasingly entrenched deflationary pressures, she said.
