ETF Trends
ETF Trends

China’s economic reforms have been lauded as catalysts for further growth, but some analysts caution against over exuberance, with China’s stocks and related exchange traded funds potentially running into trouble next year.

“There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year,” Deutsche Bank AG equity strategist John-Paul Smith  said in a Bloomberg article. “If I am wrong on China, I am wrong on everything.”

Smith predicts that the slowdown in China could drag down the emerging markets by 10% in 2014. [China ETFs Could Get Even Cheaper]

China stocks have declined for the year, but the sell-off eased after the government pledged to expand economic freedoms for the first time in at least two decades. Policy makers is encouraging private investment in state-controlled industries, raising convertibility of the currency and liberalizing interest rates.

Morgan Stanley and Goldman Sachs have upgraded their outlook on China after the free-market reforms. [China Stocks, Hong Kong ETFs Could Surge in 2014]

Smith, though, argues that China’s economy is at risk of expanding less than 5% annually over the next couple years.

“The proof will be in the implementation,” Smith said. “It will be very interesting to see if they really intend to go down the same ‘hard state liberal economic’ path that Russia did from 1999 to the autumn of 2003. So far, there is no indication they are prepared” for that.

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