China: GDP to growth 6.3%, after strong 2017 and on mitigated financial risks  - BBVA

The Research Department at BBVA, estimates that the Chinese economy will growth 6.3% in 2018 and 6% in 2019, while they predict inflation to reach 2.3% in 2018 and 2.5% in 2019. 

Key Quotes: 

“China’s 6.9% growth in 2017 was actually better-than-expected, although the market predicts growth moderation under the framework of financial deleveraging and industrial de-capacity. However, we continue our forecast that signs of moderation will emerge this year due the authorities’ continuing policy tightening, including monetary prudence and regulatory efforts to curb shadow banking activities and overheating property market, together with the de-capacity in the real sector.”

“We maintain our 2018 growth forecast at 6.3% and 2019 forecast at 6%, reflecting the strong 2017 growth and mitigated financial risks. However, they are still somewhat lower than the market consensus (Bloomberg consensus: 6.5% for 2018 and 6.2% for 2019) and the authorities’ growth target of 2018 is 6.5% as well. Nevertheless, we anticipate that the authorities broadly maintain the policy mix this year over the concern of financial stability, in particular, a prudent monetary policy and a comparatively easing fiscal policy.”

“By categories, we predict consumption will contribute to around 4.5% (versus: 4.1% in 2017) for GDP growth, dominating investment’s contribution of 1.6% (versus: 2.2% in 2017) and net export’s contribution at 0.2% (versus: 0.5% in 2017) in this year.”

“We marginally increase our 2018 monthly average projection of CPI to 2.3% in 2018 and 2.5% in 2019 (Bloomberg: 2.3% for 2018 and 2.3% for 2019) mainly due to food prices pick up. Looking ahead, the CPI and PPI will finally converge in the long term. CPI is expected to trend up gradually after the foodprices rebound from the current low level. Meanwhile, the PPI will gradually slow its pace as the supply -side reform dissipates. That being said, supply-side shocks caused by overcapacity elimination are likely to have diminishing marginal impact on price levels as investors gradually factor it into their expectations.”

“We expect China and the US will eventually reach an agreement to avert a trade war despite recently escalated rhetoric. Moreover, China needs to push forward deleveraging in over-capacity industries as well as other important items on its reform agenda including SOE reforms, financial regulatory framework etc.”

“With the capital account under tight grip, the recent movements of RMB mainly reflect current account changes. Based on the above, we revise our end-year RMB exchange rate projection to 6.40 from 6.75 previously, reflecting both recent strong CNY exchange rate and the new policy tendency.”