China's 2015-16 growth forecasts lowered following recent soft data

China's domestic activity in August generally came in softer than expected, consistent with the weak trade data (Figures 1-3). Industrial production (IP) growth was 6.1%y/y. This suggests weaker IP growth in Q3 than Q2's 6.3% and Q1's 6.4%.

In fact, GDP tracker based on a group of high frequency indicators (PMIs, trade, electricity output, steel usage, auto sales, and retail sales etc) suggest a slowdown in the model-based out-of-sample GDP growth forecast to 5.9%y/y in Q3 from 6.0% in H1.

"2015 GDP growth forecast is lowered to 6.6%y/y (from 6.8%) and to 6.0% for 2016 (from 6.6%). The downward revisions reflect the faster-than-earlier-expected slowdown in both property investment (to 3.5% YTD) and manufacturing investment (to 8.9% YTD) and continued headwinds to investment into 2016", says Barclays. 

The new (and lower) base following the NBS 2014 GDP revision on 9 September added c.10bp to the 2015 forecast. In detail, the latest manufacturing PMI as well as the August data confirmed a deterioration in sequential momentum in Q3. 

Despite strong property sales (14.7% y/y in August), developers have focused on inventory rundowns and earnings growth rather than new construction. As a result, the double-digit contraction in housing starts has persisted for 10 months (-16.7%). Meanwhile, falling commodity prices and a widening PPI deflation rate (to -5.9%) are discouraging manufacturers' inventory restocking amid soft domestic and external demand. 

The stock market crash and rising CNY depreciation expectations are also hurting investor and consumer confidence, adding downward pressure to growth in the coming quarters. 

"Looking into 2016, the three major headwinds highlighted in the medium term, excess capacity in many industries, oversupply in the housing market and high debt burdens, together with anti-corruption and policy uncertainties will continue to weigh on growth", added Barclays.