Analysts at Standard Chartered Bank (“SCB”) explained that Growth in China slowed moderately in H1.
- Policy priority has shifted to stabilising growth from deleveraging amid escalating tensions with the US.
- The budget leaves ample room for fiscal expansion, which is expected to be used to offset trade risk.
- Credit growth may catch up with nominal GDP as the tightening bias has been removed.
- We raise our 2018 growth forecast to 6.6% from 6.5% on a solid H1 print and demand-supporting policies.
"Growth in China slowed moderately in H1 mainly due to tighter domestic policies. The US-China trade tensions may cause a sharper deceleration in H2. The recent Politburo meeting called for a greater role of fiscal policy in expanding domestic demand, and a measured pace of deleveraging. We see the policy shift as a sign that the government will make every effort to achieve its 6.5% growth target for this year, in order to bolster confidence in a trade showdown with the US.
We think there is substantial room for fiscal policy to be expansionary without a revision of the budget. Budget implementation in H1 points to the risk of deficit undershooting, again. If the budget is fully implemented, fiscal deficit would be 0.9% of GDP (or CNY 1.1tn) higher than last year, according to our calculation (Figure 1). We believe the authorities are under pressure to make good use of this room, through tax cuts and faster infrastructure spending.
We raise our 2018 growth forecast to 6.6% from 6.5% due to better-than-expected H1 performance and demand-supporting policies. The authorities have removed the tightening bias of monetary policy, and we expect money and credit growth to catch up with nominal GDP in H2. Growth will likely slow further in the next few quarters due to weaker exports and the lagged effect of tight credit, but the expected fiscal stimulus can help curb the downside in our view. We now forecast growth of 6.5% y/y and 6.4% y/y in Q3 and Q4, respectively."
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