The data out of China so far has been disappointing, and has prompted economists to cut their 2014 GDP forecasts.
Bank of America’s Ting Lu was one of the economists that lowered his 2014 GDP forecast to 7.2%, from 7.6%. He also cut his Q1 forecast to 7.3%, from 8.0%.
In a new note to clients he argues that the slowdown we’ve seen in the Jan-Feb period is largely because of Beijing’s crackdown on pollution and corruption. From Ting:
“There were some early warning signals including a declining PMI in Jan-Feb, weak commodity prices which suggested weak investment demand, and falling CPI inflation which implied weak consumption demand. In hindsight, weak growth in Jan-Feb could be due to the government’s much more serious anti-pollution measures which shut down many small cement and steel mills, an escalation in the ongoing anti-corruption and anti-vice campaign which slowed consumption, cyclical slowdown of the property sector which boomed last year, the lagged impact of appreciating currency and rising rates in 2H13, and the government’s efforts in controlling local government debt and some shadow banking practice.
“However, after the weak start, we expect improvement in sequential growth in March and in the next couple of quarters thanks to existing and incoming policy adjustments. Despite our growth forecast cut, we believe there will be neither growth hard landing nor financial crisis.”
Ting does write the he also lowered his forecast because the government which has a 7.5% GDP target, could lower its floor to 7%. He anticipates this because it would give policymakers more room to pursue structural reforms.
As for the chatter about a reserve requirement ratio (RRR) cut. Ting argues that the People’s Bank of China will eventually cut the RRR rate, which currently sits at 20%. But he thinks it won’t happen “at the moment” because of the low interbank rates.
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