The outlook for Chinese economic growth is not as bad as some commentators currently suggest, and while it’s more uncertain at present, it’s certainly not collapsing.
The view presented by Goldman Sachs’ portfolio strategy research team, in a note released earlier this week, suggests that Chinese economic growth will recover in the final quarter of this year on the back of fiscal, monetary and reform policy flexibility.
Here’s Goldman on the recent slowdown in China’s growth momentum.
“China growth has slowed meaningfully in recent months, as evidenced by the disappointing official data, including IP, PMIs, and exports. Indeed, alternative indicators of Chinese economic activity have implied a sharper slowdown than the GDP data for some time, particularly in the goods sector and commodity-intensive industries. The short-term growth picture is further complicated by the current shutdown of production facilities around the Greater Beijing area due to the World Athletics Championships and WWII Memorial. In short, a weak 3Q is unavoidable and any potential growth pickup is more likely to be unveiled by September readings, which are scheduled to be released in early/mid-October”.
Despite the recent weakening of growth momentum, policy flexibility for policymakers continues to buoy expectations for a rebound in growth in Goldman’s view.
On the monetary front, the bank suggests the PBOC will follow up on Tuesday’s interest and reserve ratio requirement (RRR) cuts, predicting another rate cut of 25bps along with two additional 50bp reductions in the RRR.
Fiscally, Goldman expects local government debt swaps – allowing entities to swap shorter-dated higher-yielding debt into longer-dated lower-yielding debt – will continue while public-private partnerships will be enhanced. They also expect the PBOC will increase direct lending to policy banks, something that they believe “should further improve investment demand, in addition to higher political pressure
from the Central government on local officials to invest”.
On reforms that could potentially boost growth, the bank suggests they will be rolled out in the areas of demographic policy, social safety nets, and environmental protection, along with reform of state-owned enterprises.
With all those factors, particularly on the fiscal front, potentially on the way, Goldman expects Q4 growth of 8.0% (qoq annualised), up from 7.5% expected in Q3.