Why Morgan Stanley Is 'Bullish on China'
Yicai Global
/SOURCE : Yicai
Why Morgan Stanley Is 'Bullish on China'

(Yicai Global) Feb. 15 -- Morgan Stanley advises investors to buy Chinese stocks and predicts China's citizens will join the ranks of the wealthy by 2027 -- a bit of very encouraging news for low-income earners in the country.

China will avoid a banking crisis and become a high-income society by 2027, Bloomberg reported, citing a recently published 118-page report by the investment bank titled 'Why We Are Bullish on China.'

Overseas investors are generally concerned about China's mounting debts, slow pace of reform and potential trade conflict with the US. They are concerned leverage may get out of hand, or China may get stuck in a middle-income trap, with a stagnant economy just like in Japan in the 1990s.

In the report, the bank admits that the concerns are justified, but as its analysts point out, today's China is markedly better positioned than Japan in the 1980s and 1990s. China's real annual economic growth rate is projected to slow to 4.6 percent in 2021 to 2025, a much higher rate relative to Japan's in the 1980s.

Meanwhile, China is stepping up its transition toward high-value-added manufacturing and service industries, which will gradually become the main drivers of economic growth. Morgan Stanley estimates China's per capita income will rise to USD12,900 from USD8,100 in the next 10 years. As defined by the World Bank, a country has a high-income economy if per capita income is more than USD12,474.

Morgan Stanley also listed some other positive factors in its report, including structural reforms implemented by the country's leaders. For example, uncompetitive state-owned enterprises will be shut down to create opportunities for emerging industries and high-value-added businesses. It will boost innovation and development among Chinese companies.

In discussing China's debt problems, a main cause of concerns for foreign investors, Morgan Stanley believes the country is still unlikely to suffer a financial crisis despite the steep rise in its national debt (as a percentage of GDP) from 147 percent in 2007 to 279 percent last year. That is mainly because China is a savings-based economy, and most debts are funded by China's own savings and have been used to fund investment. Furthermore, a strong net asset position and continuous current account surplus will cushion the Chinese economy against external shocks, and China's massive foreign exchange reserves will also safeguard its financial system against destabilizing factors.

The yuan is weakening, but will not go into freefall, according to the bank. Its analysts believe China's leadership has diverted the focus away from stimulating economic growth toward prevention of financial risks, which is actually a positive viewed from the long-term perspective.

Follow Yicai Global on Facebook @yicaiglobal and Twitter @yicaichina.

Follow Yicai Global on