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China Economic Outlook: First Quarter 2015

  Author: Asia Unit ( BBVA Research )
 February, 2015
  Price: FREE


China’s growth achieved a soft-landing again last year, with the help of the authorities’ pro-growth measures. Nevertheless, the 2014 annual growth rate is only 7.4%, which missed the pre-set 7.5% target and registered the lowest level since 1991. Domestic demand remained subdued, mainly due to the persistently sluggish property market as well as its adverse spill-over effects to other related sectors. The anemic demand has prompted the authorities to beef up their efforts of monetary easing, including a November cut of benchmark interest rates and the more recent reduction of required reserve ratio (RRR). In the meantime, the PBoC continued to use a series of unconventional policy tools to inject liquidity to the banking sector. Deflation risk is on the rise as the growth rates of both headline CPI and PPI dipped further over the past few months. Apart from the sharp decline in falling commodity prices, the deep-seated overcapacity problem in certain industries continues to add pressure on domestic price levels. The increasing deflation risk is especially harmful for the corporate sector as subdued prices could exacerbate real financing costs on firms. Structural reforms have maintained the momentum, in particular, for those in the financial sector. Nevertheless, capital outflows accelerated of late and exerted depreciating pressure on the RMB exchange rate despite an expanded trade surplus due to very weak imports (namely “recessionary trade surplus”). Looking ahead, we maintain our growth forecast of 7.0% for 2015 and project an even-lower growth rate of 6.6% in 2016. The lower figures are still consistent with our soft-landing scenario and the authorities’ definition of “New Normal”. The growth could be subject to strong headwinds at the beginning of the year and then will rebound mildly as the authorities’ further loosening measures start to take effect and the external environment improves. “New Normal” calls for “New Thinking” in policymaking. In addition to the widely-expected lower growth target, the authorities could give the market more positive surprises when announcing this year’s key macro targets. For example, the current single-point target could be replaced by a clearly defined growth range. Moreover, the authorities could also introduce a lower bound for inflation rate in the face of rising deflation risk. Risks to China are still to the downside, concentrating on the uncertain external environment, increasing deflation risk and the existing financial fragilities.

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