China s growth to remain above 6% in September Tuuli Koivu, Senior Analyst

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1 China s growth to remain above 6% in September 2017 Tuuli Koivu, Senior Analyst

2 Executive summary Nordea s new China forecast expects GDP growth at 6.7% in 2017, 6.3% in 2018 and 6.1% in China should thus achieve its long-term target to double its GDP from the level of 2010 by 2020 if policy stance is not tightened noticeably. The short-term growth prospects have remained robust. Consumption continues to be the most important driver behind growth as the gradual structural shift from investment to consumption-based growth continues. Given China s still moderate income level, there is room for China to grow and converge with the highincome countries for many years to come. The biggest downside risk is coming from the vast debt stock which may push the leaders to start tightening credit growth aggressively. The renminbi has appreciated both against the dollar and the CFETS basket in recent weeks. Our expectation is that the move will calm down in the coming weeks. The number one event in China in the autumn will be the 19 th National Congress of the Communist Party, which will start on 18 October. There is more uncertainty than normally regarding the nominations to the highest leadership. North Korea raises geopolitical tensions. So far, market impact on Chinese stock markets has been limited. It remains to be seen how much the latest sanctions will bite China s trade with North Korea. 2

3 Nordea sees China s GDP growth above 6% in The new Nordea Economic Outlook expects China to support economic activity to the extent that it will achieve its target to double the GDP from 2010 until This implies growth rates above 6% in the coming years. In the first half of 2017, GDP growth was somewhat faster than in our March forecast. That raises the annual GDP forecast for 2017 to 6.7% from 6.5%. The profile of gradually declining growth is maintained. While the strong monthly data poses an upside risk in the near term, in the longer run we may see more policy tightening than in our baseline if the leaders start taking credit growth under control. Nordea's China forecast GDP growth 6,7 6,7 6,3 6,1 Private consumption 8,2 7,5 7 6,5 Government consumption 9, Fixed investment 6,7 7 6,5 6 Stockbuilding* -0,1 0-0,1 0 Exports*** Imports*** 3 4,5 3,5 3 *Source: Nordea 3

4 Consumption is the most important driver behind growth as China s income level converges towards high-income countries Despite decades of fast economic development, China s GDP per capita is still far behind the high-income countries. As a result, China has a lot of room to continue the convergence towards the highest level of productivity. This will be the main driver of China s growth in the coming years and even decades. The main emphasis of the economy is moving from investment to consumption. This is supported by income growth which continues to be fast and has accelerated both in real and nominal terms in That is one of the reasons behind robust retail sales and fast GDP growth this year in China. 4

5 China s saving and investment rates are still exceptionally high China s saving ratio continues to be exceptionally high even if it has declined during the past ten years. According to the IMF analysis, the main reasons for the high savings rate are the one-child policy and low level of social security. Both of these factors encourage households to save a large share of their income. The mirror image of the high savings rate is the high investment rate. However, in order to turn the economy more consumption driven, incentives to save should be weakened. 5

6 Market interest rates continue at elevated level no signs of further tightening in the financial sector Market interest rates have not shown any significant upward trend in recent months. However, they have remained at the elevated level reached last spring. Credit growth to the real sector continued to be strong during the summer. It seems that the authorities are not introducing new tightening policies but concentrate on fine-tuning the policy measures when the Party Congress is approaching. 6

7 China s short-term growth prospects have remained robust China s PMIs remained at a robust level in August. Especially manufacturing surprised positively which was partly due to companies very positive assessment of exports. The PMI on new export orders was at the highest level since the first half of 2010 and is a part of the global phenomenon of robust growth in manufacturing and world trade. We maintain our view that economic growth will slow down towards the end of 2017 and further in 2018 due to slower growth in the real estate sector and the tightening policies in the financial sector. 7

8 The strengthening of the renminbi has gained pace China s renminbi has appreciated considerably in recent weeks both against the dollar and the basket. The weakening of the dollar as the background, the move has been bigger almost 6% since May against the dollar as CNY/USD is already below the 6.5 level. At the same time, the renminbi has strengthened around 3% against the CFETS basket and weakened 1% against the euro. We expect that the large moves will calm down in the coming weeks, partly because the dollar is expected to remain close to its current levels or possibly even to reverse its recent weakening trend. The rise in foreign exchange reserves was rather small in August, as expected. Reserves now amount to USD 3,092bn. 8

National Congress of the Communist Party of China will start on 18 October The top leadership (Politburo Standing Committee) will be announced for the next five years.

9 National Congress of the Communist Party of China will start on 18 October The top leadership (Politburo Standing Committee) will be announced for the next five years. This year s meeting is fraught with more uncertainty than usual as President Xi is cementing his power. Particularly interesting will be any signs of Xi s successor after 2022, the possible retirement of Mr Wang, who has headed the anti-corruption campaign, and any changes to Premier Li s position. Immediate economic impacts are estimated to be moderate, but the tone of the meeting regarding the future economic policy and the attitude to the growing credit stock will be watched closely. Governor Zhou of the PBoC may retire after having pushed reforms for 15 years. 9

10 North Korea raises geopolitical tensions Raising tensions around North Korea have increased capital flows from emerging markets to safe-havens and raised the price of gold. However, the impact on the Chinese financial market has remained limited. The general upward trend in equity indices has continued while news from North Korea has caused only temporary dips. China is by far the most important trading partner for North Korea. According to the Chinese data which ends in July, imports from North Korea are clearly down from last year while exports have increased. It remains to be seen how much the most recent sanctions on North Korea will change the situation. 10

11 Thank you! Senior Analyst Tuuli Koivu, PhD Nordea Markets is the commercial name for Nordea s international capital markets operation. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.

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