China: Downgrading GDP growth rate - ING

Iris Pang, Economist at ING, notes that China is once again using infrastructure investment to avoid an economic slowdown, but analysts at ING are still downgrading their GDP growth rate for this year and next

Key Quotes

“We know that a trade war is upon us and is going to escalate. The uncertainty is timing, with one wave of tariffs after another.”

“The Chinese government is trying to offset the damage, relying once again on infrastructure investment.”

“We expect fixed asset investment will rise to 6.0% year-on-year in August from 5.5% YoY in July. Infrastructure investment could rise from 5.7% YoY to 8.0% YoY, while real estate investment could decelerate from 10.2% YoY to 9.0% YoY.”

“With more infrastructure projects, industrial production in general should improve. We expect industrial production to rise 6.2% YoY in August from 6.0% YoY in July.”

“We expect retail sales growth to rise to 8.9% YoY in August from 8.8% YoY in the previous month. The rise reflects stable growth in the spending power of the rising middle-income class, especially in the summer holidays.”

“Infrastructure investment could provide additional job vacancies for redundant workers but we are not completely optimistic on the outlook.”

“Even with fiscal stimulus supporting infrastructure investment and monetary easing at the same time, we worry about the outlook for the Chinese economy in light of the trade war.”

“We are lowering our GDP growth rate in 2018 from 6.7% to 6.6% and from 6.5% to 6.3% in 2019.”

“More stimulus would support the 2019 growth rate, but there is still a limit to what the government can do.”

“Once again, infrastructure projects will be at the heart of fiscal stimulus. This will come from credit expansion because some of the fiscal stimulus comes from SOEs or local government financial vehicles. This also means that we will see overcapacity both this year and next.”

“The side-effect of over-leveraged corporates or local government would probably be seen only after a couple of years when interest costs rise after the effects of the trade war fade. By that time, we may need to analyse overcapacity and financial deleveraging for a second time.”