"The great fall of China,” the title of an article in The Economist, sums up recent market sentiment toward China. To point, there’s a lot of falling going on. Equity markets crashed hard. The Chinese yuan was devalued, sparking fears of a currency war. Some speculate that China’s massive debt bomb is about to explode. To top it off, economic growth is sputtering and there are recession fears. Is China in serious trouble?

Let’s put it in perspective. China was in trouble back in 2008, and it had to act fast to avert a tumble. Faced with collapsing exports and an unheard-of property market reversal, China responded with an enormous stimulus package equivalent to about 13% of GDP. As a result, investment as a share of GDP, which had averaged 37% from 2000 to 2008, accelerated to 44% from 2009 to 2014. At the same time, private sector credit grew by a staggering 99% from 2008 to 2009 and has been growing at rapid rates since. The ensuing private and public sector investment binge has led to overcapacity and over-leverage. Local government debt is considered especially concerning.

Slowdown complicates the situation. It’s partly policy-driven, as China itself is concerned about excesses and sustainability of growth. It’s also population-driven. China doesn’t have the giant labour surplus it began with 30 years ago, and total population growth has stalled. Slowdown is also a result of underwhelming trade performance, which stands in contrast to the pick-up in US activity. Does this spell disaster for debt management?

Clearly the trajectory is not sustainable, but the level of debt and pace of growth alone do not outright suggest a full-blown crisis if properly managed. Recent policies undertaken by authorities suggest an acknowledgment of the problem, and they are devising mechanisms to address it. China’s public debt was 15% of GDP in 2014. If we assume all identified local government debt, which the latest government estimates put at 38% of GDP, to be liabilities on the sovereign, it would bring the aggregate ratio closer to about 54% of GDP. Granted, the sovereign may be on the hook for more liabilities, but the debt share still indicates the government has some room to manoeuver. For instance, it’s notable that most of China’s debt is domestically held; external debt is just 9% of GDP. Sure, debt service costs will increase, and deleveraging amid a slowdown will expose other vulnerabilities, but on balance the risks appear manageable given the many levers at the government’s disposal. Put another way, China is unlikely to experience a “Lehman” moment given its political and economic realities.

Even so, growth is still required to keep the overall situation from deteriorating. Can exports take the lead, leveraging nascent US and European growth? There is a glimmer of hope stemming from one of the recent sources of volatility. China’s currency depreciations in August, totaling 4.6%, shocked markets and led to immediate “currency war” banter. As discussed in last week’s Commentary, the renminbi actually saw a significant appreciation over the past 18 months in trade-weighted terms. Although the Chinese Central Bank had earlier changed the currency mechanism to allow market forces to influence the daily fixing rate of the currency, it was maintained in a narrow band against the USD, appreciating significantly against many other currencies, including the euro. Given China’s trade dependence, it is actually surprising that the authorities didn’t intervene earlier to stem the appreciation. China is continuing down the path of internationalizing its currency, capital market and financial sector reforms. But it bumped into an economic reality, and the currency response unnerved markets, spurring capital outflows. However, the outlook for China would actually be somewhat worse if the depreciations had not occurred.

The bottom line? Growth has slowed since late 2013, but keen to avoid a “hard landing” policymakers are busy providing various forms of stimulus to stabilize the economy to allow growth to get close to the 7% target range. Consumption may also help. At 38% of GDP, it has maintained a stable presence throughout the turmoil, and economic strategy is aimed squarely at increasing its contribution to growth. Adding these factors together, we estimate headline GDP growth for China to come in at 6.9% this year and 6.8% in 2016 – still a very impressive result.

This has been written by Peter Hall, EDC Vice-President and Chief Economist.