Back
25 Apr 2016
China: A bumpy landing in 2016 – Commerzbank
Analyst, Zhou Hao at Commerzbank, suggests that their core view remains unchanged that China’s economy is likely to experience a bumpy landing in 2016.
Key Quotes
“We think that China’s economy will grow 6.3% in 2016 versus consensus expectations around 6.5%. Given the recent price dynamics, we have revised up our CPI forecast for 2016 to 1.8% from 1.5% previously.
In our opinion, the rapid expansion in bank credit implies that China does not really alter its growth model, which could come at a cost to growth in the medium to long term. That said, the corporate indebtedness will continue to remain as a risk for the economy. The Chinese authorities have also acknowledged this issue and we started to see capacity reduction and labor lay-offs in the overcapacity sectors. However, the pace of overcapacity reduction is still quite slow.
Moreover, it requires a multi-year adjustment to offload the unsold housing inventories in lower-tier cities, suggesting that investment will remain low in the coming year.
Last but not least, financial risks are accumulating as banks’ profits are falling and non-performing loans are rising. We have already seen more credit default cases in China’s high-indebted manufacturing sectors, particularly in steel and coal industries. Alarmingly, recent cases also suggest that the state-owned enterprises (SOEs) are unable to be immune.
Notably, while further slowdown in investment is inevitable, steadily growing consumption supported by the services industry will help reduce the “tail risk” facing the economy.”
Key Quotes
“We think that China’s economy will grow 6.3% in 2016 versus consensus expectations around 6.5%. Given the recent price dynamics, we have revised up our CPI forecast for 2016 to 1.8% from 1.5% previously.
In our opinion, the rapid expansion in bank credit implies that China does not really alter its growth model, which could come at a cost to growth in the medium to long term. That said, the corporate indebtedness will continue to remain as a risk for the economy. The Chinese authorities have also acknowledged this issue and we started to see capacity reduction and labor lay-offs in the overcapacity sectors. However, the pace of overcapacity reduction is still quite slow.
Moreover, it requires a multi-year adjustment to offload the unsold housing inventories in lower-tier cities, suggesting that investment will remain low in the coming year.
Last but not least, financial risks are accumulating as banks’ profits are falling and non-performing loans are rising. We have already seen more credit default cases in China’s high-indebted manufacturing sectors, particularly in steel and coal industries. Alarmingly, recent cases also suggest that the state-owned enterprises (SOEs) are unable to be immune.
Notably, while further slowdown in investment is inevitable, steadily growing consumption supported by the services industry will help reduce the “tail risk” facing the economy.”