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China Country Risk Report Q4 2018

China Country Risk Report Q4 2018

Key View:

We forecast China's real GDP growth to fall over the coming years, averaging 5.9% from 2018 to 2022, versus 7.1% over the past five years. The Chinese govern-ment is increasingly committed to reducing financial risks in the economy and increasing environmental protection, which is likely to weigh on investment growth. Additionally, the country's long-term trade outlook continues to face downside risks from rising global protectionism. That said, the consumer sector is likely to be a bright spot over the medium term.

The Chinese central government appears to be shifting its focus towards speeding up reforms, and plans to reduce overcapacity, improve the efficiency of state-owned enterprises (SOEs), and encourage private investment are steps in the right direction. The Politburo Standing Committee for the 19th Central Committee of the Communist Party of China (CPC) that was elected on October 25 2017 appears to be more reform-minded. However, progress is unlikely to be smooth over the coming years, due to political and social considerations. Should the CPC drag its feet on badly-needed SOE reforms and the curbing of overcapacity and debt in the industrial sectors, the economy could be relegated to a multi-year stagnation that could prove difficult to escape.

We expect the Chinese yuan to remain under pressure due to poor technicals, ongoing trade conflict with the US, and loosening bias by Chinese policymakers. That said, the weakness is likely to be modest as depreciatory expectations are not entrenched, while the currency is supported by positives such as the govern-ment's efforts to limit money supply growth and boost the private sector.

Major Forecast Changes

We have revised up our 2018 and 2019 real GDP growth forecasts by 0.2 percentage points (pp) and 0.3pp to 6.7% and 6.4% respectively. The more positive growth outlook is partly due to better-than-expected economic activity in H118, but it also reflects stimulus measures undertaken to counter the weakening economy.

We have revised our average 2018 and 2019 forecasts weaker to CNY6.62/USD and CNY7.10/USD respectively (from CNY6.38/USD and CNY6.78/USD previously).

Key Risks

China's overall debt level is elevated, and there exists the possibility that the economy's extensive debt overhang could lead to a rapid rise in bad debts, cascading defaults, and a significant downturn in economic growth.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
China's Growth To Cool Amid Financial Sector Clean-Up And Trade Conflict
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
Chinese Policymakers To Continue With Targeted Monetary Support
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Chinese Policymakers To Speed Up Tax Cuts And Infrastructure Projects
TABLE: PROPOSED PERSONAL INCOME TAX STRUCTURE
Structural Fiscal Position
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
China Country Risk Q4 2018ContentsCurrency Forecast
Chinese Yuan To Weaken Amid Continued Trade Tensions And Policymakers' Easing Bias
TABLE: CURRENCY FORECAST
10-Year Forecast
The Chinese Economy To 2027
Further Slowdown As Economy Rebalances
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
Liu's Leadership Appointment Positive For China's SOE Reforms
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Major Challenges Over The Coming Decades
Global Macro Outlook
Strong Growth, But Greater Headwinds Too
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: CHINA – MACROECONOMIC DATA AND FORECASTS

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