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China’s Sweeping New National Security Law Raises Concerns About Internet Controls, And May Increase Pressure On Hong Kong
By Duncan Hewitt @dhewittChina on July 01 2015 5:03 AM EDT
ChinaFlag_2008

China on Wednesday passed a wide-ranging new national security law to "protect people's fundamental interests.” Pictured: China's national flag is raised during the opening ceremony of the Beijing 2008 Olympic Games at the National Stadium on Aug. 2008. Reuters/Jerry Lampen

SHANGHAI -- China on Wednesday passed a wide-ranging new national security law, covering everything from military security and territorial sovereignty, to cyber security, the environment and food safety. It also calls for strengthening China’s financial system and banking infrastructure, and protecting core industries and areas of the economy, including the financial system and grain security, along with China’s interests in space, deep oceans and polar regions.

Chinese top legislature, announcing the law, said it would "protect people's fundamental interests.” However the law’s wide scope and relatively vague clauses have alarmed some analysts, who see it as further evidence of tightening controls on society under President Xi Jinping. The law calls, for example, for the protection of “core socialist values,” ensuring “cultural security” and combating the influence of “harmful moral standards.” Concerns have also been raised that it might put more pressure on Hong Kong, which is part of China but has its own legal system, to enact similar security legislation in future.

Human rights groups and foreign business organizations have raised particular concerns about the law’s provisions regarding what it calls “sovereignty in the national internet space,” notably its requirement that network infrastructure and information systems should be “secure and controllable.”

Some have said this will affect the ability of foreign technology companies to operate in China: there are suggestions that foreign IT providers may be kept out of deals with state-run businesses, financial companies and the military, while businesses operating in China have also raised concerns about the safety of their own networks, and about the impact of the blocking of many websites by China’s “Great Firewall.”

XiJinping_Painting_May2015
A portrait of Chinese President Xi Jinping ® is displayed at an art shop in Beijing, China on May 25, 2015. Reuters/Kim Kyung-Hoon
In response to questions on the issue, a spokesperson for China’s legislature, the National People’s Congress, said at a news conference in Beijing on Wednesday that it was normal to have systems to protect cyber and information security, adding that many major Western countries have long had regulations to protect "sovereignty in the Internet space."

However, Prof. Willy Lam, a specialist on Chinese politics at the Chinese University of Hong Kong, said China’s concern about the impact of the Internet on its security and society was one of the prime motivations for passing the law. “Internet security is really the top priority,” he told International Business Times. “The government perceives the penetration of dangerous western ideas about democracy into China via the Internet as one of the biggest threats it faces.”

The new law also shows the emphasis placed on security by China’s president, who has also set up a new National Security Commission to coordinate policy on such issues, Lam suggested. “Xi Jinping has a comprehensive conception of national security,” he said. “He doesn’t just see it in terms of specific threats, like terrorism -- they have listed 11 key areas of concern.”

The law also sends “a strong message to the world,” Lam added, by emphasizing China’s growing determination to defend what it sees as its rights internationally -- something highlighted by the recent tension with the U.S. and Southeast Asian nations in the South China Sea, where Beijing has reclaimed islands in disputed waters.

SouthChinaSea_Reclamation_May2015_1
Chinese dredging vessels are purportedly seen in the waters around Mischief Reef in the disputed Spratly Islands in the South China Sea in this file still image from video taken by a P-8A Poseidon surveillance aircraft provided by the United States Navy on May 21, 2015. Reuters/US Navy Handout
“This law moves the goalposts,” Lam told IBTimes. “It has enlarged the definition of national security to include outer space and the polar regions, because of their importance in oil and gas. So this is staking out territory -- as with the works on the islands in the South China Sea.”

But analysts say that the law -- which stresses defending “the socialist system with Chinese characteristics,” is also a reflection of the leadership’s anxiety about domestic stability, amidst fears that a slowing economy could lead to more threats to Communist Party rule. China is already in the midst of a crackdown on civil society that human rights groups have said is the toughest for two decades -- with many nonprofit activists and civil rights lawyers detained over the past year. And there are fears the new law could facilitate further clampdowns.

“The vagueness of the law gives the party leadership the biggest room for maneuver -- because the freedom of interpretation of its clauses rests with the authorities, so if they want a reason to target people, this will make it easier,” Lam said.

Beijing last year also revised its regulations on state secrets, and is currently preparing to pass new laws on terrorism and non-governmental organizations. (Critics say the latter is aimed at limiting the activities of foreign NGOs.) Combined with the new national security law, Lam said, the government would now have a “comprehensive range of security legislation” to employ in its battle against those it sees as its opponents.

“Xi Jinping is anxious to be seen to be using legal weapons,” he said. “This gives him the pretext to explain to the international community that they are not violating human rights, that everything is being done in accordance with the rule of law with Chinese characteristics.”

Democrats in Hong Kong, meanwhile, have warned that the bill’s emphasis on the city’s “obligations” to safeguard the sovereignty and territorial integrity of China as a whole may mean more pressure on Hong Kong to pass its own security and counter-subversion laws. Previous attempts to pass such a law in Hong Kong were abandoned following public protests 12 years ago -- and Hong Kong’s Chief Executive C.Y. Leung said on Wednesday that the current government, which has two more years in office, “does not have any plan to enact such legislation.”

HKProtests_July12015
A pro-democracy protester holds a yellow umbrella, the symbol of the Occupy Central movement, during a march to demand universal suffrage in Hong Kong, China on July 1, 2015. Reuters/Tyrone Siu
But with Beijing angered by the pro-democracy ‘Umbrella Movement’ protests in Hong Kong last year, some democrats saw the timing of the move, on the anniversary of Hong Kong’s return to Chinese sovereignty, as sending a message to the city that such plans would eventually be back on the agenda. China has argued that failures to pass an anti-subversion code in Hong Kong contributed to the spread of the Umbrella Movement, which Beijing says was illegal.

Andy Xie Says China Stock Market 'Still Very Immature'
http://www.bloomberg.com/news/videos/201...y-immature-

Jul 12 2015 at 2:53 PM Updated Jul 12 2015 at 7:02 PM

Beijing lures business to Shanghai with visas, low taxes and help for the kids


Beijing is doing all it can to make Shanghai alluring to business executives as it styles the city as an alternative to Hong Kong. Steve D'Arcy


by Angus Grigg

Shanghai has made its latest move to supplant Hong Kong as the region's dominant financial centre, offering foreign executives tax holidays, permanent residency and even the option of bringing their nanny.

As China's central government continues to squeeze Hong Kong politically, Shanghai is looking attract foreign talent and enterprises away from the former British Colony.

Such an aggressive move has been blunted in the shot term however by the slide on mainland markets over the last fortnight and the central government's emergency measures to restore stability. The recent government intervention is expected to slow the opening up of China's stock markets and the capital account.

The measures to attract foreign executives were launched before the recent market pull-back and came at a time of increasing offshore interest in mainland China markets.

Income tax holiday on offer

Foreigners willing to establish a regional head office in the Shanghai Free Trade Zone are being offered a three- to five-year personal income tax holiday, according one person familiar with the matter.

The person said it was only being offered to invited companies and their senior executives.

At present China's top personal tax rate is 45 per cent and it applies on income above 80,000 yuan a month ($16,600). This makes Shanghai far less competitive than Hong Kong which has a flat tax rate of 16.5 per cent.

"Tax is one of the main issues which has stopped international financial executives moving to mainland China," said Antony Dapiran, a partner with law firm Davis Polk & Wardwell in Hong Kong.

In December the Shanghai Free Trade Zone was extended to include the city's financial district of Lujiazui, as China looks to hasten the opening of its capital account and move to a fully convertible yuan.

The city government, which has long dreamed on making Shanghai the region's dominant financial centre ahead of Hong Kong and Singapore, has also loosened visa regulations.

It is now offering permanent residency to foreign executives who have spent four years working in the city and earn more than 600,000 yuan a year.

City claims interest is high

"We have had lots of inquiries about this in recent days but the detailed regulations are yet to be released," said Yao Ye, an official at the Shanghai Foreign Enterprises Service Corporation.

"The Shanghai government wants to attract higher level foreign talent and make the city more cosmopolitan."

In Hong Kong white collar workers are granted permanent residency after seven years.

The Shanghai government is also offering a new five-year visa for those working at so-called innovative companies.

At present most foreign workers in Shanghai must renew their visas annually.

Those with the new five-year visa or permanent residency will also be able to bring a foreign nanny to Shanghai, the city government said on June 30.

"It can still be hard to get staff to go to the mainland, particularly Beijing," said Mr Dapiran.

"It's not just the tax, but quality of living issues like pollution and schooling."

Shanghai's air pollution has improved in recent years but it remains significantly worse than Hong Kong.

China's commercial capital also lacks Hong Kong's unencumbered internet, beaches, national parks and international flight connections, but has attracted big name international schools in recent years.

British public school Harrow will open its Shanghai campus next August, joining other elite schools including Dulwich College and Wellington College.

Much cheaper than Hong Kong

Shanghai also has one of the world's best subway networks and the cost of living is vastly lower.

According to Numbeo consumer prices are 23 per cent higher in Hong Kong compared with Shanghai, while apartment rents are 150 per cent higher in the former British Colony.

Mercer's 2015 Cost of Living Survey ranked Hong Kong as the world's second most expensive city, while Shanghai came in at number six.

Hong Kong's place as the region's dominant financial centre is being challenge by Singapore, which has become a hub for private banking, funds management and commodities.

At the same time Beijing is looking to assert more control over Hong Kong, raising concerns about the erosion of the rule of law and press freedom.

China’s stockmarket turmoil reflects profound economic changes
THE AUSTRALIAN JULY 13, 2015 12:00AM

David Uren

Economics Editor
Canberra

The ructions in China’s sharemarket are a small symptom of the stresses as the world’s second-largest economy adjusts to the reality that the drivers of its growth — high levels of investment, exports and the migration of peasants to the cities — are all generating diminishing returns.

While Australian officials have welcomed the slowing in China’s growth from the double-digit rates experienced until 2010 (it peaked at 14 per cent in 2007) to about 7 per cent, arguing it will be more sustainable, what is occurring is not a gentle deceleration but a profound transformation in the sources of China’s growth.

For that part of China’s economy that Australians really care about — the heavy industry that drives its demand for our resources — the transition will involve not a slowdown, but an outright contraction.

Since this was not anticipated by the Australian resources industry, which has instead based its expansion plans on China’s demand for resources continuing to rise at a rapid rate for the next decade, the result will be seriously glutted minerals markets.

The extent of the shift was outlined on Friday at the ANU Crawford School’s annual China Update conference, organised by Melbourne University’s Professor Ross Garnaut.

Perhaps the biggest bombshell was dropped by Dr Meiyan Wang, from the Institute of Population and Labour Economics at the China Academy of Social Sciences: in the first quarter of this year, the number of migrant workers in the cities was 6 million below the same period last year.

“Some may worry the decline is the result of the downturn in China’s economic growth; but I think the decline is one of the reasons why China’s economic growth is slowing,” she said.

The rural population aged 15 to 19 reached a peak last year and is now starting to decline. Labour shortages are emerging in rural districts as demographic change starts having real effects on the labour market. The growth in the number of migrant workers stops and then reverses.

As well as driving the urbanisation of China with its relentless demand for steel, the flood of migrant workers from low productivity farm work to high productivity factory work in the cities has been responsible for the greater share of China’s overall productivity growth, which achieved extraordinary levels of just under 5 per cent between 2000 and 2007. As the tidal movement of people from the country to the city slows, so too does productivity.

Garnaut cites Conference Board data showing that since then, productivity growth has slowed to zero. Measurement of productivity is inevitably imprecise and Garnaut says IMF’s calculations suggest there is still some productivity contribution to growth, but it also shows a steep decline.

Garnaut says the old growth model was based on rates of investment without precedent anywhere in the world delivering high productivity and a rising profit share of GDP, supported by the movement of several hundred million people from the country to urban centres.

“The slowing rate of urbanisation after the turning period of Chinese economic development induces deceleration in growth in demand for all of the infrastructure required by a growing urban population, including housing and transport infrastructure.

“As with demand for investment goods, this induces an absolute fall in demand for many goods that occupied a large place within the old model of growth. This is an important part of the current anxiety about oversupply of housing in many Chinese cities — an oversupply that is transmitted with acceleration into supplying industries.”

Since 2005, as labour has started to become scarce, wages have been rising faster than productivity and the profit share of the economy has been slipping. This is consistent with official policy, which is to engineer a shift from investment to consumption- led growth.

Garnaut argues that this shift requires an absolute reduction in total investment, not just a fall in its share of spending. Changes in the required level of investment depend not on the rate of growth but on changes in the rate of growth. If growth falls from 10 per cent to 7 per cent, the level of investment required could be expected to fall by a similar amount, absent changes in productivity. This would flow through to a reduction in demand for the inputs to its industrial growth.

Consumption would have to rise quickly and by a large amount to maintain domestic demand to maintain the new lower level of growth. To date, there is only glacial movement in China’s astronomically high investment share of GDP of just under 50 per cent.

Superimposed on these structural changes in China’s economy are the more cyclical forces generated by the government’s intervention in the economy to respond to the global financial crisis. The massive fiscal and monetary expansion was modelled on the country’s successful response to the Asian financial crisis in the late 1990s, but on a much larger scale.

Much of the debt was pushed out through provincial governments funding infrastructure, while a lot also went into property development, contributing to the forests of vacant tower blocks in some of the inland cities.

Debt to GDP rose from an already elevated 148 per cent of GDP to an extraordinary 261 per cent.

The Chinese authorities moved early this year to arrest the slide in property prices that gathered pace through last year by reversing 2010 measures that had been designed to arrest excessive speculation. It was made easier for people to buy second homes and capital gains tax exemptions were extended to people selling investment property after as little as two years.

The slide in property markets was one of the reasons for the sharemarket bubble — people pulling funds out of real estate had few alternatives to equities.

The dean of the finance school at the Beijing Central University of Finance, Economics Professor Liqing Zhang, blames the government for the market bubble. It wanted to shift the business from debt to equity funding by developing capital markets, but believed it had to control the process.

“The government tried to intervene in the price and in the scale of the market. It had an approval system which every listed company had to pass. It is government directed behaviour.

“A few months ago, the Chinese authorities were saying the stockmarket has a very bright future and key leaders said we can see very high prices in the future.”

There are mixed views on whether the government’s intervention will prove successful in a durable way, and on whether failure would spell broader systemic problems among the “trust” firms in China’s shadow-banking sector which hold much of the margin debt.

Garnaut argues the market volatility is not, in itself, a direct threat to the profound long-term structural changes under way in the Chinese economy. However, he cautions: “It does have the potential if sustained to throw political dimensions of the support for productivity-raising reform and structural change off course.”

China trade down as demand falls
THE AUSTRALIAN JULY 14, 2015 12:00AM

David Uren

Economics Editor
Canberra

China’s traders are struggling after having been responsible for much of the country’s meteoric growth over the past two decades, with imports down heavily and exports achieving only the most marginal growth.

Trade figures for the first six months of the year show exports increased by 1 per cent to the equivalent of $US1.1 trillion while imports slumped by 15.5 per cent to $US810 billion.

The downturn in trade is being repeated across the Asian region, with the US economic recovery failing to deliver the traditional benefits to Asian business of increased demand for imported consumer goods.

China’s June trade report was slightly better than markets had expected. However, ANZ chief China economist Li-Gang Liu said it still showed China’s authorities would have difficulty meeting their growth target.

“China’s trade performance in the first half of this year appears to have entered a ‘new normal’, falling sharply on sluggish external demand and a strong renminbi,” he said.

Given that the currency was expected to remain steady, the pressure would be on the Chinese government to boost domestic demand using the stimulus of budget spending, he said.

Imports have fallen for eight months in a row. While this partly reflects the sharp fall in prices for China’s commodity imports, volumes have also been weak.

ANZ economists said China’s iron ore imports for the first half of the year were down by 1 per cent while imports of coal had dived 38 per cent.

China’s steel mills were compensating for weak demand at home by lifting exports of steel products, which were up by 28 per cent in the first half of the year, a growth rate many economists do not believe is sustainable.

Ratings agencies Moody’s yesterday cautioned that China’s steelmakers faced declining profitability with dwindling demand.

Westpac chief international economist Huw McKay said China’s exporters had achieved some growth in June and were doing better than those in many of its neighbouring countries, where exports were contracting.

He said Asia’s manufacturing nations, such as Taiwan and Korea, and its commodity producers such as Indonesia were suffering from a trade downturn.

“Global trade is the lifeblood of the region and it is not growing as quickly. There are great difficulties with some of the most open manufacturers in the region.”

Taiwan had enjoyed a burst of trade growth last year, partly generated by the success of the Apple iPhone 6, but the electronics trade has weakened since then.

Mr McKay said even during periods when the world economy had been performing reasonably, there had been less spin-off for traders.

ANZ’s head of global market research, Richard Yetsenga, said growth in global trade had been the weakest across the past three years since globalisation accelerated in the 1980s.

“Normally, when the US economy recovers, the trade deficit deteriorates, but it hasn’t happened this time. The outright level of imports in the US economy has been flat for a decade now,” he said.

“For a trade-sensitive region like Asia, the US recovery is very different this time, coming without a recovery in trade volumes.”

Mr Yetsenga said weak growth left the Asian region very exposed when the US began increasing interest rates, which was expected before the end of the year.

They say 7% will be 7%...

China posts stronger-than-expected GDP at 7pc
THE AUSTRALIAN JULY 15, 2015 1:11PM

Scott Murdoch

China Correspondent
Beijing


The halt to the Chinese share market rally has cast a shadow over the economy. Source: AP
CHINA’s economy grew by 7 per cent in the second quarter, defying economists’ expectations after a string of interest rate cuts and despite recent stock market volatility.

The growth rate beat most forecasters’ expectations who had predicted growth would come in at 6.8 per cent, the lowest rate in more than 10 years.

However, four interest rate cuts since November last year have stoked domestic economic activity and kept the second quarter growth rate in line with the first three months of 2015.

The 30 per cent stock market wipe-out over the past few weeks has yet to affect economic growth rates, but most economists expect it to have an impact in the third quarter GDP numbers.

Despite the positive result, the Shanghai Composite was early this afternoon down 1.4 per cent, shedding gains from a three-day rally that lifted the benchmark roughly 13 per cent. The smaller Shenzhen Composite was down 1 per cent. In Hong Kong the Hang Seng index was nearly 1 per cent higher.

The Australian dollar was stronger after the release of the growth figures, trading at noon (AEST at US74.82 cents, up from US74.28 cents yesterday.

Capital Economics China economist Julian Evans-Pritchard said China’s second quarter GDP figures contained an “unsustainable” surge in financial sector activity which reflected the huge number of investors who entered the stockmarket before the downturn began.

However, he said there were positive signs that growth momentum was still prevalent in the Chinese economy, despite ongoing questions over whether the official data was accurate.

“The stronger than expected figure will inevitably spark renewed questions over the veracity of the official data,” he said.

“While the actual growth is almost certainly a percentage point or two slower than the official figures show, there are good reasons to think that the latest figures are mirroring a genuine stabilisation of conditions on the ground.

“One reason is that the surge in brokerage activity associated with the equity bubble feeds directly into the services component of GDP.”

The data come as the world searches for growth, and the number gives an endorsement to the economic groundwork Beijing has laid in recent months to put a floor under the country’s slowdown, with its measures to lift spending, offer tax breaks and cut interest rates.

Some other statistics released today by the National Bureau of Statistics showed little signs of turnaround. Value-added industrial production, fixed asset investment and retail sales all slowed in the second quarter from the first.

However China’s housing sales figures for the first half of the year showed a rise of 12.9 per cent year-over-year, up from the 5.1 per cent gain recorded in the first five months as lower borrowing costs, earlier gains in the stock market and relaxed mortgage requirements whet appetites for home purchases.

Before today’s results, there had been few signs of a turnaround in a quarter that started against the backdrop of a broad stock rally and ended under the shadow of that rally’s collapse.

Economists have frequently questioned the methodology underpinning Chinese statistics, given discrepancies between regional and national growth figures, data collection shortfalls and, at times, a lack of transparency.

Several economists have constructed alternate measures of growth based on freight rates, electricity output and other data. Citibank said recently that it believes China’s actual growth rate could be closer to 5 per cent.

In recent weeks, there had been some signs that the economy was starting to stabilise. Property prices in China’s largest cities are rising after an extended slump. Industrial production edged up recently. And new bank loans were up significantly in June, adding capital for companies’ expansion.

But global demand remains weak, and broad areas of the world’s second-largest economy had largely failed to respond to four interest-rate cuts and several adjustments in reserves that banks are required to hold since late last year.

“We continued to see slower industrial production, slower real-estate investment, slower local government spending. Across the board, things are weak,” said Brian Jackson, an economist with data provider IHS Inc.

Infrastructure spending, a staple driver of Chinese growth, has also failed to gain much traction as local governments battle debt and other constraints on their outlays.

In a bid to get projects going, the State Council — China’s cabinet — issued at least 10 guidance papers on infrastructure investment in May. China’s top economic planning agency, the National Development and Reform Commission, has outlined 1,043 projects for public-private partnership totalling 2 trillion yuan ($US322.1 billion) in investment. But of those, only about 10 per cent are underway, according to research firm Gavekal Dragonomics.

Local government spending accounted for 27 per cent of China’s gross domestic product last year, according to Goldman Sachs, which estimates that a 1 trillion yuan shortfall in local infrastructure investment from 2014 could cut growth by 0.7 percentage points this year.

A continued economic slump had raised the pressure for more government stimulus. The People’s Bank of China, which has been enlisted to throw its weight behind an emergency rescue of the stock market, is sticking to an accommodative but cautious monetary-policy approach. In a statement yesterday that mirrored word for word one last quarter, it pledged to maintain “prudent” policies and ensure “adequate” liquidity.

The 30 per cent drop in Chinese share prices over three weeks isn’t expected to cause major damage to the broader economy given the relatively small number of Chinese stock investors. Similarly, the stock market’s upward march since late last year had little economic effect beyond boosting the financial sector itself, economists say.

Without that bump, however, growth would have been even lower. As trading picked up pace in the first quarter of 2015, the contribution from financial services to GDP expansion nearly doubled to 1.3 percentage point compared with 0.7 percentage point in 2014, according Capital Economics.

The Shanghai Composite Index has partially recovered in recent days. But the slump has raised concern that much-needed reform could be put on hold at a time when China is trying to direct its economy away from exports and manufacturing to consumer-led growth.

With Dow Jones

China's Debt-to-GDP Ratio Just Climbed to a Record High
http://www.bloomberg.com/news/articles/2...ecord-high

Jul 17 2015 at 11:00 AM Updated 9 mins ago

China's real estate, credit and investment bubble risks global recession

Highrise construction site in Taiyuan in north China's Shanxi province. AP


by Vanessa Desloires
China is the number one threat to the global economy, analysts say, with an over-inflated "triple bubble" threatening to drag global gross domestic product below 2 per cent.

On the surface things appear to have stabilised in China this week. The nation's second-quarter GDP number came in at 7 per cent, above analyst estimates of 6.8 per cent, while retail sales and industrial production figures well exceeded expectations.

But GDP is still at its lowest level since 2009, and the Shanghai Composite Index failed to bounce on the positive news on Wednesday, although it has largely stabilised this week, down 1.4 per cent on Friday.

Credit Suisse's global research team, led by Andrew Garthwaite, said China's "triple bubble" - a combination of the third biggest credit bubble, the biggest investment bubble and the second biggest real estate bubble of all time - was the single biggest risk to the global economy.

Chinese debt overshadows US peak

China's private sector debt-to-GDP stands at 196 per cent, 40 per cent above its long-term trend. This is more extended than the US at the peak of its credit bubble.

"Historically, a financial crisis has been preceded by credit being more than 10 per cent above trend," Mr Garthwaite said.

The investment share of GDP in China was higher than any other country in history, Mr Garthwaite said.

China was in the middle of a transition from investment to consumption-led growth, which historically leads to a halving of the growth rate.

"China has consumed more cement in the past three years than the US did in the entire 20th century," he said.

Way too much property

China had a "clear cut" housing bubble, Mr Garthwaite said. The size of its real estate as a share of GDP, around 23 per cent, was triple that of the US at its peak.

There was also way too much property, with housing starts at 12 per cent above sales, vacancy rates at 15 to 23 per cent and inventories in its third- and fourth-tier cities holding the equivalent of five years' demand.

House prices to wage ratios also appear excessive in global terms, while the rental yield remains very low at around 2.4 per cent.

"Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing," Mr Garthwaite said.

China's house prices have fallen for the first time without political intervention, and housing accounts for more than half of total household assets, indicating a significant negative wealth impact, according to Credit Suisse.

"If house prices fall by 15 per cent or more, then we think that we are likely to get a hard landing and the authorities risk running out of fiscal firepower," Mr Garthwaite said.

"Moreover, with housing contributing to a third of local government revenue, 56 per cent of banks' collateral and around a fifth of GDP, the knock-on impacts could be immense.

Risk of a hard landing

The research comes after Morgan Stanley's head of emerging markets Ruchir Sharma warned earlier this week "the next recession will be made in China".

Mr Sharma told Bloomberg he was steering clear of Chinese stocks, saying if China's economic slowdown continued, it could drag global economic growth below 2 per cent.

Mr Garthwaite said while China's economy had contributed more than a third of global growth over the past five years, its GDP had slowed but its economy was substantially larger.

"Were China's real GDP growth to slow to 3 per cent in 2015 (and assuming simplistically no spillovers to global GDP), China's contribution to global GDP growth would slow by 0.5 percentage points," Mr Garthwaite said.

"That would imply that global growth in 2016 would be 2.7 per cent, against an IMF forecast of 3.2 per cent.

"This would keep global growth at the same levels as in 2014 and 2015, with an acceleration in the US, Europe and Japan counterbalancing the weakness in China to a large extent."

Lombard Street Research analyst Diana Choyleva said deflationary forces were "likely to persist as China deals with surplus capacity and excessive debt under the burden of an expensive currency".

To rebalance its growth, Ms Choyleva said China needed to feel "a few years of economic and financial pain".

The biggest risk was China's policymakers halting their progress towards opening up the country's economy, on the back of its perceived failure with loosening policy on its share market which led to its collapse, she said.

Credit Suisse did however find signs of improvement, including stabilisation in tier one and tier two cities, a trade surplus at a five-year-high, and room to move with China's policymakers.

How Beijing Intervened to Save China's Stocks
http://english.caixin.com/2015-07-16/100829521.html

Investors pulled $142 billion from China between April and June. That extended the total outflow from the world’s second-largest economy over the past five quarters to $520 billion, wiping out all the inflows since 2011 when the country’s growth started to slow, the analysts said.

Emerging Markets Had Biggest Outflow Since 2009, JPMorgan Says
http://www.bloomberg.com/news/articles/2...organ-says