Research Team at Goldman Sachs, notes that over the past several months, the market-based China growth risk factor has declined precipitously. Key Quotes “Calibrating these moves into units of economic growth, a rough estimate is that the market-based risk factor is now pricing in sub-2% growth in China, having declined about 4pp over the course of the last year or so. Directionally, this is in line with declines in China growth visible in indicators such as our Current Activity Index (CAI), which is also showing signs of slowing. However, the market’s assessment of China growth seems to have run a bit faster and farther than the data themselves, both in terms of the level of growth it is now pricing and the recent change in growth rates, say over the last six months. While suggestive of a market ‘overreaction’, it is possible to square the circle in two ways. First, there is a good deal of imprecision, particularly when we try and back out a growth rate, whereas when looking at changes in the growth rate, we are far more confident in our calibrations. Second, markets are forward-looking, and so perhaps the market is making an implicit statement about the forward view as well, with expectations of risks intensifying even after the current and ongoing bout of stress. Regardless, what is clear is that this is an economic risk that is, to a first order, well appreciated by the market and roundly priced. This is a double-edged sword. While, optimistically, it means that market damage has been proportional (or maybe a bit more than proportional) to the decline in growth outcomes seen already, it also means that if Chinese growth does not stabilise or if risks shift from pure growth concerns to crisis-like concerns – such as the loss of currency control, or intensification in credit losses – incremental market downside could exist as well.” For more information, read our latest forex news.