China Country Risk Report Q4 2019
We have revised our forecast for growth in 2019 to 6.3% from 6.5% previously, reflecting the more challenging external environment after the re-escalation in US-China trade tensions in May. Our forecast remains above consensus estimates of 6.2%, and reflects our expectation for more aggressive stimulus from
Beijing and for it to feed through in H219. Besides continuing to support investment and exports, we believe that Beijing will soon announce and implement demand-side stimulus, to attain the goal of increasing disposable incomes as announced during the National People's Congress in March.
We at Fitch Solutions believe that there are several contradictions within the Chinese economy that pose risks to medium-to-long-term growth. These contradic-tions include: supporting growth vs de-risking; state-owned entity control vs market reforms; funding the Belt and Road Initiative vs a shrinking current account surplus; fostering innovation vs discouraging dissent; and more.
We at Fitch Solutions maintain our primary and final fiscal balance forecasts for 2019 at 4.8% and 2.8% respectively. Support measures announced at the National People's Congress in March, such as the value-added tax cuts worth CNY2.0trn, are likely to continue weighing on revenues. The likelihood of further fiscal stimulus measures presents additional downside risks to the government's fiscal projections. In particular, demand-side stimulus measures could increase expenditures or decrease revenues further.
China announced a new mechanism for setting the Loan Prime Rate, a key reference rate for banks in setting lending rates, which we expect to lead to lower credit costs and an improved monetary policy transmission mechanism. However, the extent to which smaller businesses will benefit from this is likely to be limited as their risk profiles are weaker than larger businesses, which will be reflected in larger spreads over the new Loan Prime Rate, implying higher borrowing costs. That said, the generally lower interest rates should help to support slowing economic growth over the coming quarters, although this means that efforts to deleverage the economy are likely to continue taking a backseat.
We at Fitch Solutions are dialling up bearish expectations on the yuan, due to the increasing likelihood of further escalation in the US-China trade war, which has been the main driver of yuan movements since 2018. Accordingly, we have revised our 2019 average yuan forecast to CNY6.95/USD (from CNY6.85/USD previously) and our 2020 average forecast to CNY7.30/USD (from CNY6.95/USD previously).
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