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In a recent update titled China Scare, BlackRock said the depreciation of China’s currency, the sell-off in equity markets and declining confidence in Beijing’s policymakers have caused the country to replace Greece as the global economy’s foremost concern.
Compared with Greece, however, China is “fundamentally a much bigger deal”, BlackRock said.
“The problem? Investors are losing faith in the ability of Chinese policymakers to control their markets,” the update said.
Chinese policymakers are at risk of markets getting ahead of them – “Capital outflows could intensify pressure on the currency, making a one-off devaluation more likely,” the update said.
This would be a risk to markets, as a large one-off devaluation would "shock" and increase trade tensions.
However, BlackRock indicated that the most likely move by Chinese policymakers this year will be to gradually depreciate the currency further, likely in the high-single digits.
For China to “break the damaging cycle”, however, it needs to tackle excess capacity, particularly in its state-owned steel and coal companies, BlackRock said.
“We see 1:5 odds for such bold action in the near term but do detect a greater appetite for tackling supply-side reforms,” the update said.
[Related: China slowdown a cause for concern]