FXStreet (Delhi) – Research Team at Goldman Sachs, expects China to continue the “bumpy deceleration” that it has experienced since 2010, although a sharper slowdown remains a serious concern, particularly if effective policy support is not delivered.
Key Quotes
“This year marked a modest slowdown in overall growth, but a much more pronounced one in industrial activity, particularly as measured by our proprietary indicators. Growth should slow further in 2016, with our GDP forecast at 6.4% for the year, and alternative measures of activity trending towards a meaningfully weaker outturn.”
“Both supply- and demand-side perspectives support a forecast of slower growth. On the supply side, all three elements of a “Solow decomposition” of potential output growth–labor force growth, capital deepening, and total factor productivity growth—should decelerate in coming years.”
“On the demand side, the domestic private sector seems unlikely to boost spending significantly—while there are areas of strength in services and the “new economy”, these areas are still overshadowed by substantial industrial overcapacity and debt burdens, and consumer confidence is subdued following the market and policy shocks of 2015.”
“Meanwhile, the foreign demand environment is tepid and the renminbi has appreciated sharply on a trade-weighted basis in the past few years. Recent trade improvement has come on the import side via a combination of falling commodity prices, sharper deceleration in import-intensive sectors, and “onshoring” of further supply chain activity.”
“With limited drivers of growth outside the consumer sector, the government will need to provide substantial support to have a chance of keeping growth near the 6.5% pace recently referenced by President Xi and Premier Li as a five-year target (in order to double incomes from 2010 to 2020).”
“Fiscal policy will likely be the preferred stimulus tool, and indeed we have seen a substantial ramp-up in project approval and muni bond issuance in recent months, though reticence to spend on the part of local government officials may be impending progress.”
“We also expect further monetary easing–with the short term repo rate to fall to 1.5% by year-end 2016 as 300bp of RRR cuts more than offset capital outflows next year–and some modest depreciation against the US dollar to limit CNY TWI appreciation. A large depreciation is not our base case, but we view it as a significant risk should economic performance disappoint policymakers’ expectations, particularly later in 2016 as the IMF Board’s decision on whether to add the Chinese renminbi to its Special Drawing Right basket fades into memory, China’s G20 presidency draws to a close, and (we expect) the USD keeps appreciating.”
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