CHINA will likely avoid a financial crisis and is on track to reach high income status by 2027, according to a new Morgan Stanley report on the nation’s longer-term prospects titled “Why we are bullish on China.”

    The sweeping outlook comes amid growing concern over China’s surging debt levels and the impact of a potential trade spat with the United States.

    While acknowledging those concerns as legitimate, the analysts point to China’s increasing shift into high value-added manufacturing and services that will play a central role in boosting per capita incomes to US$12,900 over the next decade from US$8,100 now.

    If China manages to pull off that feat, it will join South Korea and Poland as the only large economies with a population of more than 20 million to achieve that over the past three decades, Morgan Stanley said.

    The World Bank defines high income economies as those with a gross national income of at least US$12,476 per person.

    There are other positives, too. Consumption and services are increasingly powering growth and proposed structural reforms such as the closure of uncompetitive State-owned enterprises will clear the way for new, high-value added industries in areas such as health care, education and environmental services, according to Morgan Stanley. That would spur the creation of a new generation of Chinese multinational corporations with significant presences both at home and abroad.

    At the same time, the risk of a financial shock remains low even though overall debt soared to 279 percent of the economy last year from 147 percent in 2007. That’s because borrowing has been funded by China’s own savings and been used for investment.

    Strong net asset positions provide a buffer along with an ongoing current account surplus, high foreign reserves and the absence of significant inflationary pressures that would destabilize the financial system, according to the report.

    A one-off devaluation of the yuan is also unlikely though the currency will likely weaken further, according to Morgan Stanley analysts.

    Indications that China’s leadership are shifting their focus from stimulating the economy to reining in financial risk bolsters their upbeat case, the analysts said.

    “The most significant development on the policy front is that policymakers are now signaling a willingness to accept slower rates of growth, and place more focus on preventing financial risks and asset bubbles, indicating that they would not protect growth at all costs, often with the use of investment of a low return nature,” the analysts wrote.

    Still, there are risks. Much will depend on the commitment to tackling the debt pile and reshape State-owned enterprises.

    It’s likely that China’s debt management will follow a path similar to Japan’s, although economic growth will compound at a much higher rate over coming years.

    Morgan Stanley analysts see growth at an average of 4.6 percent in 2021-2025. That’s less than half the 9.6 percent average growth rate over the past three decades.

    “With a starting point of lower debt, [China’s debt to gross domestic product today is where Japan’s was in 1980] and per capita levels [China’s per capita gross domestic product (PPP) today is where Japan’s was in the mid-80s],” the analysts wrote.

    “By not allowing for a sharp appreciation of its currency as Japan did after the Plaza Accord, China today is arguably better positioned to still achieve growth rates that can outpace global growth.”

    (SD-Agencies)