China Economic Update: BMI 2015 Forecast Raised, Rebalancing To Be A Long-Term Effort

We have upgraded our 2015 real GDP forecast for China from 6.0% to 6.7%. The upgrade is not so much a more bullish take on the economy as much as it is a recalculation in terms of the government's balancing of long-term economic reform efforts with short-term stimulus.

In July, we raised our 2014 real GDP forecast for China from 7.0% to 7.3% on the back of the economy's stronger-than-expected performance in H114, as well as indications that the government would be slightly more aggressive in supporting economic growth via fiscal and monetary easing.

Indications are that badly-needed reforms aimed at rebalancing the economy away from over-investment will continue to be balanced with growth-supportive imperatives. This means that harder-hitting measures that would help to unlock private consumption (such as interest rate liberalisation, which would allow Chinese citizens to earn higher rates of return on their deposits but would raise lending costs) could be shelved for the time being… We have just upgraded our 2015 real GDP growth forecast to 6.7% from 6.0% previously, though we note that this is at the expense of future growth, as credit availability will need to be tightened more aggressively over the medium term.

  • We believe that the government/People's Bank of China (PBoC) will opt to keep credit conditions sufficiently loose to allow real GDP growth to continue to cool at a somewhat managed pace over the near term. However, the top leadership of the Communist Party of China (CPC) is more reform-minded, economically, than its predecessors. Reform prospects have arguably been boosted by President Xi Jinping having somewhat aggressively consolidated his power over recent quarters with his highly touted anti-corruption campaign (which is doubly useful as a purge of political opponents).
  • We think that Xi's move will lay the groundwork for more substantive reforms of the financial system and state-owned enterprises (SOEs) over the next few years. This will trigger slower economic growth, as it will be a forced change for China's decades-old, investment-intensive growth model.
  • In the meantime, we see the government doing what it can to prevent an acute growth slowdown, as this would also be politically untenable. We do not believe that the CPC can put reforms off forever, but it does have considerable financial resources (as well as significant control over the economy's major levers) that are sufficient to keep economic growth from collapsing over the next 2-3 years.
  • We still believe that the economy's growth model will have to change in order for China to reach higher planes of economic development. Crucially, this has not yet occurred, especially with credit growth continuing to outpace nominal GDP growth. However, we are now slightly more constructive on the CPC's current leadership in terms of their willingness to eventually take the steps necessary for this transition.

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