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.
Economic reforms have been ponderous over recent quarters, and signs of policy incoherence at the provincial and even central level are beginning to emerge. Should the Communist Party of China (CPC) continue to drag its feet on badly-needed SOE reforms and the curbing of overcapacity in the industrial sectors, the economy could be relegated to a multi-year stagnation that could prove difficult to escape.
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 pressu res, we are downgrading our 2017 CNY forecast to CNY7.1000/USD, versus CNY6.9 000/USD previously. Our end-year 2016 forecast stands at CNY6.8000/USD.
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, 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.
|Nominal GDP, USDbn||10,655.0||11,341.1||11,608.0||12,192.6|
|Real GDP growth, % y-o-y||7.4||6.9||6.3||5.9|
|Consumer price inflation, % y-o-y, eop||1.5||1.6||2.0||2.5|
|Exchange rate CNY/USD, eop||6.21||6.49||6.80||6.90|
|Budget balance, % of GDP||-2.0||-2.4||-3.0||-3.1|
|Current account balance, % of GDP||1.6||2.7||2.6||2.5|
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