China's economic growth model is looking dated, debt is piling up and capital outflows are rising. Policymakers are walking a tightrope, trying to balance short-term stimulus with tough reforms to ready the economy for the future.

Some three dozen BlackRock portfolio managers debated China's challenges with policymakers, entrepreneurs and academics at an event in Beijing in early May. A new BlackRock Investment Institute publication captures the highlights of these discussions. Our main conclusions:

We recognize China's economy is slowing, likely by more than official statistics indicate. Yet we do not expect an economic hard landing or market crash in the near term.
The four trends that most influence our investment strategies and thinking: China's reining in runaway credit growth; the shift toward a services economy; the risk of a property market downturn; and the government's ability to stimulate the economy.
Many of us believe China can meet these challenges in the short term, with some hiccups along the way. Policymakers appear aware of the risks, and have credible long-term plans (ambitious reforms) and short-term tools (stimulus) to address them
China has contributed more than a third of global economic growth since 2008-2009, and its current slowdown is reverberating around the world. We take a peek at Australia, examining China's effect on the country's currency and interest rates.
Officials are keenly aware of the dangers of debt rollovers by state enterprises and local governments. They appear confident they can avoid a major credit crunch, in part by converting local government loans into lower-yielding municipal bonds.
We think the People's Bank of China will further cut interest rates and historically high bank reserve ratios in an attempt to reignite growth. The government also appears ready to prop up real estate prices and boost infrastructure spending.
China has committed to open its capital account by year end, but it is unclear what exactly "open" means. The risk of capital flight will likely make the country tread carefully, and we do not expect a truly free-floating yuan currency any time soon.
Investors should think of China as a continent, not as a country. Economic trends, development and policy implementation vary greatly by region. The economy is slowing in the Northeast and West, but going strong in prosperous coastal areas.
It is tempting to simply dismiss buying Chinese assets: too much debt, too little growth and too policy-driven. Yet one can worry about the economy and rising risks in the long run, but be bullish on markets in the short- to medium term.
China's domestic equities markets look frothy after more than doubling in twelve months. We prefer discounted Hong Kong-listed Chinese equities, especially small- and medium-sized stocks, as we expect their liquidity discount to dissipate.
We like selected Chinese corporate credits in offshore markets due to their relatively high yields and limited duration risk.
Jean Boivin, Neeraj Seth, Andrew Swan, Helen Zhu

Jean Boivin, Neeraj Seth, Andrew Swan, Helen Zhu

BlackRock Investment Institute

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The Continent of China

The Continent of China - BII Interactive Chart

This interactive map compares economic and population metrics across provinces in China.

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When the Fed Yields

Latest Global Insights Publication from the BlackRock Investment Institute.

The U.S. economy is on an upswing and asset markets are looking frothy. We examine what happens when the Federal Reserve finally yields to this reality and raises short-term interest rates.

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