Earlier this year the entire financial community was watching China, waiting for what was being described as the next major crisis to hit financial markets. But as we approach the end of 2016, a relative calm has descended over China and it would appear that the market is markedly more comfortable about China than it was six months ago.

Granted, concerns about China’s economic outlook remain yet the country’s authorities seem to have taken action regarding other concerns, namely foreign exchange outflows and yuan volatility.

After these actions, it seems as if investors are more at ease with the Chinese government’s ability to manage its economy, currency, and capital markets. It remains to be seen if the country can control its debt problem without a substantial rebalancing of the financial system, although evidence that China’s bank recapitalisations have already began does suggest that policymakers have a plan in place to deal with this key issue.

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That being said, there are several events that could disrupt the calm that has descended over China. UBS’ Global Economics analysts Donna Kwok and Tao Wang summarise these risks in a research note send out to clients this week. Here’s a summary of their views.

Risk one: Property investment growth begins to contract even as starts and sales grow

“Despite the strong double-digit growth prints in YTD sales (26%y/y) and new starts (14%y/y), YTD construction and investment have expanded only by around 5%, with little sign of more pipeline momentum to come…if developer sentiment deteriorates more than we expect (e.g. because sales slows much more, or the government tightens more aggressively), we could see property construction activity go into outright contraction, further dragging down China’s heavy industrial activity and investment, overall economic growth and commodity demand.”

Risk two: Capital outflows and the pressure on RMB returns

“We do see risk of greater market pressures on capital outflows and the currency – due to sudden expectation shifts on US Fed moves or USD strength, and/or concerns for China’s domestic economy or asset markets. Such pressures may lead to higher global investor risk aversion, a revival of China macro concerns and further FX reserve losses, which could negatively impact China’s capital markets before the end of 2016.”

Risk three: A liquidity event

“Onshore market sentiment has stabilized since April’s credit market sell-off…Our onshore strategists expect the ongoing slow downshift in credit and rates yield curves to continue in the medium-term, thanks to: 1) muted inflationary pressures; 2) investor expectations for further policy support in light of still fragile economic activity; and 3) the PBC’s maintenance of stable liquidity. However…sudden liquidity squeeze or temporary credit crunch could be triggered by an unexpected rise in defaults, or a sudden tightening of regulations. The former could arise from the further worsening of issuer asset quality, or SOE restructuring and excess capacity reduction events.”

Upside risk one: Faster progress on structural reforms

“The pace of reforms seems to have stepped up in the past couple of months, with an intensifying stream and widening array of announcements. Should the market see further signs of progress…confidence could improve…For example, if mergers of large SOEs are immediately followed by capacity reduction plans, or if debt-equity-swap deals are accompanied by an asset or management restructuring in affected companies.”

Upside risk two: A rebound in property and investment growth

“Developers remain cautious for now, but if sales momentum holds up, their construction plans may turn more optimistic in order to meet strong demand, especially if destocking in lower-tier cities continues. This, in turn, could support demand for commodities and construction materials, helping to prevent a fallout in related industries following their recent strong price rebound.”

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