Citibank has turned bearish on the prospects for Chinese economic growth in the years ahead, slashing their forecasts for GDP in 2016 and 2017 by a significant margin.
The bank’s economics team now expects China’s economy to grow by 6.3% in 2016, down from 6.7% seen previously. For 2017, growth is forecast to accelerate to 6.5%, although this is significantly below the 7.1% pace previously forecast by the bank.
According to China’s government, the economy is currently growing at an annual pace of 7.0%, the equal-lowest level since the Global Financial Crisis.
Citi’s 2016 forecast is in line with that offered by the IMF in its latest world economic outlook, but significantly below the 7.0% and 6.8% levels expected by the World Bank and Asian Development Bank.
Here’s Citi on the basis for its downgrade:
“The Chinese economy showed little evidence of stabilization in July. While maintaining our GDP growth forecast of 6.8% for this year, we are cutting our estimates of official GDP growth rates to 6.3% for 2016 and 6.5% for 2017 (from 6.7% and 7.1%, respectively, last month) to reflect slow economic and policy adjustments. The YoY pace of growth in 1H 2016 will be particularly challenging due to base effects for the service sector. We continue to expect the political cycle may turn favorable to growth (i.e., less negative spillovers of anti-corruption) from 2H-2016. Our downgrade also assumes that the growth target in the upcoming 13th Five Year Plan (2016-2020) will be reduced from 7.0% to 6.5% or even 6%. This should create almost no material impact on the economy, given that we have argued for a while that the actual growth rate was around 5% (or perhaps even lower) in 1H, and the growth can at best stabilize at that level in 2H”.
Aside from lowering expectations for economic growth, Citi believe the Chinese renminbi will continue to weaken against the US dollar, upping its mid-2016 forecast for the USD/CNY pair to 6.80 from 6.25 seen previously.
They also expect CPI will remain below 2% until the final quarter of 2016.
Fitting with further weakness in the renminbi, inflation and economic growth, they also expect the PBOC to unleash another wave of monetary policy easing in the months ahead.
By the end of the June 2016 they forecast the PBOC to cut interest rates twice and reduce the reserve ratio requirement for banks on five separate occasions.
This scale of easing is more aggressive than other economic forecasters, but certainly not out of the realms of possibility should economic growth slows, as Citi currently forecast.