China Country Risk Report Q1 2020
We have revised our 2019 and 2020 real GDP forecast to 6.1% and 5.9% respectively, a reflection of our expectation for external headwinds to continue weighing on the economy in 2020. Investment is likely to remain under heavy pressure as companies increasingly relocate away from China, and those which do not are likely to postpone or shelve plans for renewal and expansion. We also believe private consumption and net exports will continue to drag, but less so, as demand side stimulus measures and slowing imports are likely to cushion the impact.
We have revised our forecast for China's current account surplus for 2019 and 2020 to 1.5% and 1.0%. The revision accounts for a larger fall in imports than we previously expected, which has helped to support the trade balance. We continue to expect China's current account surplus will diminish in future owing to China's rebalancing towards consumption. We expect inbound portfolio investment to play a larger role in balancing the balance of payments accounts over the coming years, as China gradually opens up its financial markets to foreign investors.
We maintain our forecasts for China's primary and final fiscal deficit to come in at 4.8% and 2.8% of GDP respectively in 2019. For 2020 we expect the fiscal deficit to widen to 5.2% of GDP. We expect revenue collection to remain weak owing to tax cuts and slowing economic growth. Additional fiscal spending is also likely given that Beijing's focus on stimulating growth amid a weak economic growth outlook.
We maintain our view for yet more monetary easing following the RRR cut announced on September 6, which will take effect in phases out to November. The estimated CNY900bn liquidity injection from the 50bps broad cut and 100bps additional targeted cut will help support economic activity and financial stability. Continued external headwinds from the US-China trade war is likely to see Beijing cut the RRR further and easier monetary policy is likely to remain in place over the coming quarters.
The yuan still faces downside pressure as we believe that a re-escalation in trade tensions between the US and China is likely despite the apparent détente. We expect inflation in China to outpace that in the US through 2020 on the back of food inflationary pressures from pork shortages, but Beijing's willingness to stabilise its currency would somewhat offset our bearish arguments. We are revising our average exchange rate forecasts to CNY6.90/USD in 2019 and CNY7.25/USD in 2020 and 2021 to account from stronger-than-expected yuan performance in Q419.Major Forecast Changes
We have revised up our forecast for China's real GDP growth to come in at 6.1% in 2019 and 5.9% in 2020. We have revised our forecast for the yuan to average CNY6.90/USD in 2019 and CNY7.25/USD in 2020. We have revised our forecast for China's current account surplus for 2019 and 2020 to 1.5% and 1.0% respectively.
Our yuan forecast assumes no lasting and comprehensive resolution to the US-China trade war in 2020 and is thus subject to upside risks.
Weak revenue collection could spur local governments to take on additional debt to fund development spending, which raises the risk of an unsustainable build-up of debt. The State Council called for an increase in special purpose bond issuances to fund additional spending on infrastructure and other development projects. This adds to the debt burden of local governments, which stood at around 20% of GDP in 2018 [excluding its off-balance sheet debt from local government financing vehicles (LGFV)]. When Beijing undertook massive fiscal stimulus programmes after the 2008 financial crisis, cash-strapped local governments created opaque LGFVs to meet economic growth targets. This not only undermined their competitiveness and profitability but also resulted in a significant increase in debt. While China has introduced debt-for-bond swaps programmes since 2016, which allows local governments to swap their unofficial liabilities for government bonds, much of the debt from LGFV remains hidden from their balance sheets.
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