Reports that the IMF will vote to include the CNY in its special drawing rights (SDR) basket by the end of November reflect a notable success for the embattled PBoC, as well as a symbolic milestone in China's rise to global economic prominence. However, we do not believe that the move will provide significant support for the CNY over the medium-term, and retain our forecast for the currency to average CNY6.68/USD in 2016.
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, and growth-negative reforms will be increasingly difficult to implement.
Major Forecast Changes
High frequency macroeconomic indicators including rail freight volumes, import growth, purchasing managers' indices, and steel exports (among others) paint the picture of a rapidly cooling economy, and we continue to believe that headline GDP figures do not encapsulate this trend. However, given the fact that the Chinese government is likely to announce a 6.5% annual real GDP growth target for the next five years, we note that it is unlikely to print a figure significantly below this rate for 2016. As such, we have upgraded our 2016 real GDP forecast to 6.3%.
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 could lead to a rapid rise in bad debts, cascading defaults, and a significant downturn in economic growth.
|Real GDP growth, % y-o-y||7.7||7.4||6.7||6.3|
|Nominal GDP, USDbn||9,502.2||10,382.9||10,837.8||11,171.0|
|Consumer price inflation, % y-o-y, eop||2.5||1.5||1.0||2.0|
|Exchange rate CNY/USD, eop||6.05||6.21||6.55||6.80|
|Budget balance, % of GDP||-1.9||-2.1||-2.5||-2.4|
|Current account balance, % of GDP||1.9||1.6||2.7||2.7|
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