We expect real GDP growth to continue to slow in 2016, and forecast it to fall to 6.3%, versus 6.9% in 2015. As the economy continues to work through its significant overcapacity issues, job losses in sectors ranging from coal mining to steel production could be significant. Meanwhile, trade accounts will continue to underperform versus previous years, with both exports and imports set to contract for a second straight year.
Xi Jinping has largely consolidated his leadership position, and we believe that he is firmly in control of the Communist Party. This means that policy-making will remain highly centralised and generally cohesive over the medium term. While there remain divides on how to manage the economy, we believe that an increased emphasis will be placed on monetary stimulus as growth continues to slow. That said, targeted fiscal measures are also likely as the pace of the slowdown has likely surprised Beijing to the downside . The level of acceptance from the government regarding the re-allocation of labour from industries with significant overcapacity issues will be particularly crucial.
Major Forecast Changes
The PBoC will eventually be forced to relent in its support for the embattled Chinese yuan, and we retain a bearish outlook on the currency. Amid increasing downside pressures, we are downgrading our 2016 CNY forecast to CNY7.1000/USD, versus CNY6.8000/USD previously.
The PBoC's continued support of the Chinese yuan is contrary to its monetary easing operations aimed at shoring up economic activity, and we expect the central bank to relent on the former. However, there exists the possibility that monetary conditions become more acute over the course of 2016, which, in tandem with the economy's extensive debt overhang, could lead to a rapid rise in bad debts, cascading defaults, and a significant downturn in economic growth.
|Real GDP growth, % y-o-y||7.3||6.9||6.3||5.9|
|Nominal GDP, USDbn||10,380.2||11,044.0||11,054.6||11,337.5|
|Consumer price inflation, % y-o-y, eop||1.5||1.6||2.0||2.5|
|Exchange rate CNY/USD, eop||6.21||6.49||7.10||7.25|
|Budget balance, % of GDP||-2.1||-2.4||-2.4||-2.4|
|Current account balance, % of GDP||1.6||2.7||2.8||2.7|
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