Sentiment on the Chinese economy has taken a turn for the worse.
Chinese economic data has started to falter after a period of near-relentless consistency over the past couple of years. Recent months have seen Chinese stocks and the Chinese yuan tumbling.
The benchmark Shanghai Composite Index has fallen over 20% since late January, leaving it in a technical bear market. It currently sits at the lowest level since May 2016, having been at a two-year high earlier in the year.
The Chinese yuan has also been hammered, losing over 6% since late March, leaving it at the weakest level since late last year.
While not yet to the same extremes seen in late 2015 and early 2016, fears about the Chinese economy are growing, at a time when trade tensions between China and the US are intensifying.
This has made a lot of people nervous, including those at China’s National Institution for Finance and Development (NIFD), a Chinese government-backed think tank.
In a study leaked on the internet earlier this week, and which has subsequently been removed, the group warned that “financial panic” is likely to escalate in the period ahead.
“We think China is currently very likely to see a financial panic,” the NIFD study said.
“Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.”
The group warned of bond defaults and liquidity shortages, and suggested the recent rout in Chinese financial markets posed dangers to the economy during a period of heightened trade tensions and rising US interest rates.
It also singled out the use of leverage by Chinese stock investors, warning that at around five trillion yuan, it has again reached the levels seen in 2015 just before the Chinese stock market plunged in 2015.
“We failed to clean up the leveraged funds after the 2015 market rout; they have staged a comeback in a new guise,” the NIFD said.
The group said that China should stand ready to roll out a mix of fiscal and financial-sector measures in the event of a systemic crisis.
It added that authorities should be ready to step in with full financial support if a major default roils markets, rather than taking “piecemeal steps”.
“China’s State Council should be ready to implement any market support measures in coordination with the central bank and other regulators, key government ministries, and the police,” it said.
Similar steps were also seen during China’s stock market plunge of 2015, and progressively became more aggressive as financial markets continued to slide.
While the web link has been removed, its contents were confirmed to Bloomberg by a NIFD official, according to the South China Morning Post.
By DAVID SCUTT