New Delhi, Nov 8 (IANS): The macro set-up and policy-makers' preference for orderly defaults imply that policy-makers should be able to maintain control over domestic financial conditions (i.e., real rates), allowing China to avoid a financial shock, Morgan Stanley said in a research note.

"The start of every deleveraging process in China prompts fears about downward pressure on growth. These investor concerns are re-emerging, reflected in wider credit spreads. However, we believe that some of these concerns are overdone," the report said.

"The fear is that rising default risks could turn disorderly, leading to a rapid tightening of financial conditions and a sharper slowdown in growth. We don't see this materialising given the self-funded nature of China's growth," it added.

The banking system has limited exposure to the property sector. Since non-performing loans and credit costs sit at low levels overall, it should be able to handle any rise in delinquencies in the property and construction sectors.

Policy-makers have the tools to manage aggregate demand by controlling the pace of deleveraging.

In this cycle, China's zero-Covid policy and adherence to its energy intensity and consumption targets have added downward pressure on GDP growth, which has weakened to a 4.9 per cent 2Y CAGR (underlying growth adjusted for base effects) in 3Q21.

This has prompted policy-makers to hit a pause to balance their growth and debt-management objectives, the report said.