China: moderate slowdown ahead- Danske Bank

Analysts from Danske Bank expect the Chinese economy to slow slightly as the housing market cools, spilling over to weaker construction growth. 

Key Quotes: 

“The Chinese economy has strengthened in 2016-17, pulled by a very strong housing market, a boost to infrastructure spending and rising exports on the back of a global recovery. We believe a ramp-up in steel production ahead of the winter curbs due to pollution has boosted industrial activity recently. With 2017 growth stronger than we expected, we lift our GDP growth forecasts from 6.3% to 6.7% for 2017 and from 6.0% to 6.3% for 2018.”

“We expect the Chinese economy to slow slightly as the housing market cools, spilling over to weaker construction growth. Over the past year, China has taken several steps to cool the housing market, where home sales have risen significantly and house prices in many cities have increased. Affordability is a problem and China’s focus is on stabilising house prices. Another priority has been to crack down on financial risks in the shadow banking sector, leading to a big fall in credit growth over the past year. We do not expect a hard landing though, as housing inventories are quite low (in contrast with 2014) and the export sector should experience robust growth as the US and euro area recovery is set to continue.”

“China continues to face medium-term challenges from a fast build-up of debt in the corporate sector and high growth in shadow banking. We do not expect a financial crisis in the next one to two years, as China has the tools to keep the system going, but on a fiveyear horizon, we see a high risk China will run into financial problems that will cause a material slowdown of the economy. In September, S&P downgraded China from AA- (negative outlook) to A+ (stable outlook). However, the downgrade was generally expected as Moody’s and Fitch had already downgraded Chinese sovereign debt.”

“The CNY has strengthened a lot versus the USD over past months, partly reflecting USD weakness. Recently, the USD has strengthened and USD/CNY has moved higher. We  expect USD/CNY to rise to 6.7 in 6M and then trade sideways. Opposing forces are in place: the USD should weaken again on a 12M horizon, weighing on USD/CNY, and relative economic performance should favour the USD, putting upward pressure on USD/CNY. We look for EUR/CNY to continue trending higher and recommend hedging CNY receivables.”