China Country Risk Report Q4 2018
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).
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.
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