China may consider exchange rate depreciation in the medium term in order to manage its transition to a consumption-led economy, Credit Suisse's top China expert says.
The world's second largest economy has already entered a state of deleveraging and the era of investment and of housing-led growth is over, said the vice chairman of Greater China for Private Bank, Dong Tao.
"At the moment China looks OK but the pain of a credit crunch will come," Mr Tao told the Credit Suisse Global Perspectives Forum in Sydney.
The People's Bank of China has printed $US19 trillion of wealth, he said, and "if this continues China will be able to buy the world in five years".
But as that's impossible, he said there are a couple of ways the situation could now evolve.
The first is the rest of the world could print money at a faster rate than China. The second is China could slow its money supply right down, and the third is the possibility of exchange rate depreciation.
"If you can't change the money supply, you can change the exchange rate," Mr Tao said.
"I'm not saying that it will consider exchange rate devaluation straight away, but in the medium term the exchange rate is the emergency exit."
Mr Tao believes that, over the next decade, part of the housing-related wealth that the country has built up will be destroyed as the credit cycle turns, lending growth shrinks, weighing on property values.
"We have already seen the turning point of China's credit cycle," he said. Housing used to be a lever to drive economic growth, he said, before adding "that's changing".
Mr Tao pointed to repeated recent references to risk and regulation by the Chinese government as well as officials' explicit references to the fact that "housing is for living" as reasons to hold this view.
The housing sector now accounts for 250 per cent of GDP in China, he noted, and this figure moves up to 400 per cent when housing under construction is included, a level that he said is "unheard of".
China's purchasing power has exploded, Mr Tao noted, with money supply growing at 16 per cent a year in the country. That compares to about 6 per cent growth in the US and practically zero growth in Europe.
The result of that can be seen with the Chinese tourists coming to Australia. "They just grab things because it's cheap," Mr Tao said. It's the same with housing here, he believes - it's cheap.
Mr Tao said the credit rating agencies are warning on China's exploding debt. The systemic banking risk in China is now among the highest in the world, he added.
He believes the household savings rate is going to drop dramatically.
"We're facing a very different China in the coming decade. It will consumption-driven, but from the next generation," Mr Tao said.
The average age of Porsche owners around the world is 56. In China it's 36, he said. In addition, the average length of time of holding on to that Porsche is 6.1 years for the globe but that drops to 3.4 years in China, he said.