From Barclays
We lower our 2015 GDP growth forecast to 6.6%y/y (from 6.8%) and to 6.0% for 2016 (from 6.6%). The downward revisions reflect the faster-than-earlier-expected slowdown in both property investment (to 3.5% YTD) and manufacturing investment (to 8.9% YTD) and continued headwinds to investment into 2016.
The new (and lower) base following the NBS 2014 GDP revision on 9 September added c.10bp to the 2015 forecast. In detail, the latest manufacturing PMI as well as the August data confirmed a deterioration in sequential momentum in Q3. Despite strong property sales (14.7% y/y in August), developers have focused on inventory rundowns and earnings growth rather than new construction. As a result, the double-digit contraction in housing starts has persisted for 10 months (-16.7%). Meanwhile, falling commodity prices and a widening PPI deflation rate (to -5.9%) are discouraging manufacturers’ inventory restocking amid soft domestic and external demand.
The stock market crash and rising CNY depreciation expectations are also hurting investor and consumer confidence, adding downward pressure to growth in the coming quarters. Looking into 2016, we believe the three major headwinds highlighted in the medium term – excess capacity in many industries, oversupply in the housing market and high debt burdens (especially among local governments) – together with anti-corruption and policy uncertainties will continue to weigh on growth.
We continue to look for more fiscal and monetary easing to support growth but we don’t expect that to change the economy’s structural softening trend. The weakness in recent data confirms that growth is losing momentum despite a fast-growing service sector (rising to 50% of GDP and growing at 8.4% YTD in Q2 2015). This suggests more fiscal support and monetary easing are required to stabilise growth. Indeed, to cushion the growth slowdown, the central government has recently announced a series of measures to support infrastructure investment, such as underground pipes, water and clean energy. These measures include bond issues and PBoC capital injection to policy banks, a third round of local government debt swap (CNY3.2trn in total), and accelerated projects approval by the NDRC. On monetary policy, our base case continues to look for one more interest rate cut in Q4 to lower the real cost of funding and 2 RRR cuts to offset the liquidity drain from capital outflows. Despite the intensifying capital control measures post the 11 August FX regime shift and the PBoC’s heavy intervention in the FX markets, we expect the capital outflows to persist in the coming quarters. That said, to stabilise the USDCNY in the near term, the PBoC will likely continue to be reactive rather than preemptive in monetary easing. And a stronger USDCNY target set by the PBoC will imply more RRR cuts in the near term.
