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China Country Risk Report Q4 2019

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).


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 To Roll Out Demand-Side Stimulus To Stabilise Growth
GDP By Expenditure
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Contradictions In Chinese Economic Model A Risk To Medium-Term Outlook
TABLE: SIX KEY CONTRADICTIONS
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
Monetary Policy
China On Track For Wider Primary Deficit In 2019
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
China Deepens Interest Rate Reform, Benefits To Smaller Companies Likely Limited
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
China Country Risk Q4 2019THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report is solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.ContentsCurrency Forecast
Yuan At Risk From Further Escalation In US-China Trade War
TABLE: CURRENCY FORECAST
10-Year Forecast
The Chinese Economy To 2028
Structural Slowdown To Continue Amid Rebalancing
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
US-China Trade War: Increasing Risk Of Still Higher Tariffs
TABLE: POLITICAL OVERVIEW
TABLE: VIRTUALLY ALL US-CHINA TRADE TO BE UNDER ADDITIONAL TARIFFS BY DECEMBER
Long-Term Political Outlook
Major Challenges Over The Coming Decades
Operational Risk
TABLE: OPERATIONAL RISK
Labour Costs
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE
Legal Environment
TABLE: BUREAUCRATIC PROCEDURES
TABLE: BUREAUCRATIC BARRIERS
Global Macro Outlook
Potential Policy Missteps Pose The Largest Risk To Global Growth
TABLE: GLOBAL MACROECONOMIC FORECASTS (2019-2024)
TABLE: DEVELOPED MARKETS – 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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