Commentary: No need to exaggerate China's economic headwinds

The Economist Intelligence Unit warned the world that China was set for a hard landing in its latest global risk analysis report, but closer inspection shows it to be a false alarm.

The forecasting and advisory services provider issued a report Thursday rating a sharp economic slowdown in China as their top risk scenario, on the back of concerns over the country's febrile manufacturing sector, rising debt and growing downward pressure on the renminbi, due to capital flight.

The think tank is right that the Chinese economy is experiencing headwinds, however, this is hardly breaking news. The country's leadership has spoken at length about the challenges brought by the new normal and structural reform.

The manufacturing sector is struggling. Industrial investment is falling, the trade environment is worsening and overcapacity is weighing upon the sector. However, manufacturers are busy upgrading their systems and equipment, which will create a more competitive, innovative environment.

Yes, the debt level is not low, but it is still manageable. The capital adequacy ratio of China's commercial banks is still below the international warning line, while their provision coverage ratio is above the government's requirement. Moreover, local government debt pressure will be eased by public-private-partnerships in costly infrastructure projects.

Some weakening of the Chinese yuan in the short term is understandable. China's forex controls have been loosened and the Federal Reserve's interest rate adjustment will unavoidably lead to capital outflows. Nevertheless, there is no basis for substantial yuan depreciation as China's trade surplus and forex reserve are more than adequate and its foreign debt is low.

However, the report is right about one thing: Countries are increasingly dependent on China's economy for investment and products. A sharp slowdown would have a severe knock-on effect worldwide and is a scenario that nobody wants to see.

The government's efforts to stabilize the stock market are part of measures to avoid financial risk spilling over to the whole country and the rest of the world, which is understandable and necessary in emergency cases and won't compromise the country's drive to give the market bigger sway in the long run.

Despite the challenges, China is determined to keep GDP growth at a minimum of 6.5 percent this year while pressing ahead with economic restructuring.

It is a difficult balancing act for China, policymakers must walk a fine line between preventing systematic risks and reducing overcapacity while at the same time avoiding a credit bubble.

Fortunately, the government has ample means to revive economic confidence, ranging from more flexible fiscal and monetary policies to more targeted industry and public support.

Forewarnings are necessary to keep the world economy on track, but exaggeration only causes unnecessary panic, upsetting it.

The headwinds challenging China's economy are there, and the country is facing them square-on and will hopefully navigate them skillfully. Endi