The Chinese economy in the first quarter of this year grew 6.7% y/y, a slight slowdown from Q4 2015’s 6.8%. The economy slowed in spite of a rally in the property market and a proactive policy easing. On a sequential basis, the Chinese economic grew just 1.1% in Q1 as compared with 1.5% growth in Q4 2015. This weakness is not expected to be temporary, said Commerzbank in a research report.
The PBoC might ease policy warily amidst the recent rebound in the CPI figures. Meanwhile, sales of housing might decelerate in the quarters to come as several major cities in the country have tightened their property policy since March.
“We maintain our below consensus forecast of 6.3% for this year. For 2017, we expect a growth to slow to 5.8% in 2017 due to the property over-supply and debt overhang”, added Commerzbank.
Meanwhile, the central bank is likely to lower policy rates further by 25 bps in the second quarter due to the uncertain outlook of the economic growth. Furthermore, before the end of 2016, the PBoC is expected to lower the reserve requirement ratio by 150bps to offset the outflows of capital and maintain liquidity conditions, according to Commerzbank.
Meanwhile, there is a low probability of a large scale fiscal stimulus. This is because a fiscal stimulus might worsen the issue of over-capacity, while having a constrained impact on stimulating the underlying demand. The Chinese yuan continues to be under major pressure to depreciate, given the strong outflows of capital that is evident in a large capital account deficit, said Commerzbank. However, the central bank is expected to intervene in order to keep the currency from depreciating sharply, on concerns of increasing external debts and market instability.
China has launched a “CNY Exchange Rate Index (CERI)” that tracks the yuan against a basket of 13 major foreign currencies. This emphasises the PBoC’s plans to permit the CNY to depreciate against the USD.
“Our base case is for USD-CNY to reach 6.65 by end- 2016”, noted Commerzbank.
