The biggest threat of last year – a hard landing in China – seems to have resurfaced with several banks highlighting dangers that could still derail the world’s second largest economy.

Warning of an Impending Crisis in China

Skyrocketing property prices, mounting credit and a slowdown in gross domestic product growth to levels not seen in over a decade have China bears warning of an impending crisis.

According to the latest Bank of America Merrill Lynch European Fund Manager Survey, a Chinese hard landing and commodity price collapse is now the most feared tail-risk in the survey, according to one quarter of fund managers.

The Biggest tail Risk Chart China

The IMF says the Chinese economy faces “important challenges” despite its relatively favorable near-term outlook, with the rapid growth in total social financing being highlighted. The fund says this issue “raises concerns” over the quality of investments, especially as credit is flowing through less-well supervised parts of the financial system. “While good progress has been made with external rebalancing, growth has become too dependent on the continued expansion of investment, much of it by the property sector and local governments whose financial position is being affected as a result. High income inequality and environmental problems are further signs that the current growth model needs to change,” the IMF adds.

Morgan Stanley’s June Survey of 130+ Investors Echoes Bearish Fears

1.  GDP growth expectations still much below consensus

  • Most respondents think China GDP will grow 7.0-7.5 percent in 2013. In May most expected the growth  would be 7.5-8.0 percent.
  • 74 percent (up from 48 percent in May) expect 2013 GDP growth to be 7.5 percent or lower. The Bloomberg consensus estimate has fallen to 7.8 percent from 8.0 percent.
  • On a weighted-average basis, respondents expect 7.3 percent growth vs. 7.5 percent in May.

China growth Expectation may chart

China growth Expectation June chart

2.  China Over next 12 months: Long-only slightly less bearish

Long-only investor expectations exhibit similar trends when compared to the overall group, but the long-only group is slightly less bearish in general:

  • MSCI China: 3.9 percent upside (vs. 7.0 percent in May);
  • Hang Seng Index: 4.1 percent upside (6.4 percent); and
  • Shanghai A-share: 5.6 percent upside (5.7 percent).

Expectations on 3 major indices chart