While they still have one of the more optimistic forecasts for economic growth this year, Nomura’s Asia economics team of Yang Zhao, Changchun Hua and Wendy Chen, have joined others in cutting their expectations for Chinese economic growth next year, forecasting an expansion of just 5.8% from 6.7% on the back of a faster-than-expected pace of economic rebalancing.
“The main drag is slowing property investment growth, which may turn negative and in turn drag fixed asset investment growth down to single-digit levels in 2016,” the trio note.
“Property investment growth is likely to drop into negative territory next year due to the oversupply in lower-tier cities, further dragging on related industries and overall economic growth”.
The boost to economic activity this year from the enormous rally in the nation’s stock market, which subsequently corrected by around 40% over the past three months, will also weigh on growth in their opinion.
“The abnormally high contribution from the financial services sector to GDP growth in H1 2015 will normalise as the equity market has corrected significantly”.
The charts below from Nomura reveal the widening differential between the median market expectation for growth compared to Nomura’s house view, along with the expected contribution to growth from the various components of the Chinese economy in the year ahead.
The trio also suggest that the government will officially lower its growth target for 2016 to 6.5% from about 7% this year, something they believe will “keep a balance between the growth rate and the ongoing process of economic restructuring.”
“Economic growth is now being driven more by consumption and the service sector, rather than investment and related manufacturing sectors. However, an inevitable result during such a rebalancing process is that the speed of growth will be much lower than before,” they note.
While they expect the government will open the fiscal taps to help boost infrastructure spending, they note Beijing seems reluctant to launch a strong stimulus package.
“We factor in a moderate fiscal stimulus from the central government and continued monetary easing in our new forecast. We estimate the budget deficit to climb to 3.0% of GDP in 2016-17,” the note says.
“Policy banks may continue to leverage up – either via pledged supplementary lending (PSL) from the People’s Bank of China (PBoC) or via issuance of special financing bonds – to help fund infrastructure projects. Public-private partnership (PPP) will also provide some financing support, in our view.”
Despite the trio’s view that “high leverage and overcapacity in the economy have blocked the transmission mechanism of monetary policy to stimulate investment growth in the private sector,” they suggest that the People’s Bank of China (PBOC) will continue to ease policy – both through reserve ratio and interest rate cuts – over the course of next year.
“We expect the PBoC to cut the bank reserve requirement ratio (RRR) by 50bp on four occasions in 2016, on top of base money injections, which in part will be used to sterilise capital outflows arising from slower economic growth and CNY depreciation expectations. We also expect two 25bp cuts to the benchmark policy rate. M2 growth may fall to 10.6% in 2016 from our estimate of 12.8% in 2015,” they said.
While they have slashed their expectations for growth next year, they do not expect the Chinese economy to suffer a “hard landing”, something that will no doubt please most investors globally if correct given heightened concerns over the Chinese economy of late.
“Slower growth may result in higher unemployment and rising financial risks, but not, in our opinion, an economic hard landing as systemic risks remain contained.”
“Financial risk is likely to increase and more credit default events may occur. We expect a rising non-performing loan (NPL) ratio in the banking sector and more bond defaults. However, we see limited systemic financial risk given the government is a large stakeholder in the financial sector and as the general government debt is still at a manageable level.”
The downgrade from Nomura corresponds with the World Bank lowering its expectations for Chinese economic growth overnight with the group now eyeing an economic expansion of 6.7% next year before moderating to 6.5% in 2017.