As concerns over the state of the Chinese economy loom large over the World Economic Forum at Davos, Goldman Sachs joins the chorus of pessimistic voices with the publication of a report which casts doubt on the country’s economic prospects.
The report, titled “Walled In: China’s Great Dilemma,” lays out the challenges facing the world’s second largest economy and warns that policymakers have few good options to tackle them.
Analysts at the investment bank believe that the enormous and complex economic transition which China must undergo will keep emerging markets under pressure for at least the next five years.
“If the reforms are implemented too quickly, the country risks a sharp slowdown,” Goldman said. “If the reforms are implemented too slowly or not at all, China risks an unsustainable increase in its debt-to-GDP ratio, which could push the country past the tipping point into economic and, in all likelihood, political instability.”
In addition to the poor policy response from the government, Goldman believes that China is hamstrung by its unfavorable demographics, poor education system and unfavorable business environment. It expects that China will devalue the yuan in the coming years.
The report concludes that its clients should sell their assets in China and emerging markets, re-balancing towards developed markets and fixed income investments such as government bonds.