China unlikely to achieve 2016 growth target range, growth likely to be below target level

If China National People's Congress supports for the 2016 GDP growth target range of 6.5%-7.0%, it will be a difficult task to achieve that level. This is because if the government set policy priorities, such as deleveraging, destocking and capacity reduction is followed, it will create major headwinds to the short term outlook. So far in 2016, there has been no sign of stabilization in growth.

For example, China posted disappointing foreign trade in January, where exports shrank 11% y/y from December's contraction of 1.4%. This was the biggest drop since March 2015. Imports declined 19% y/y from a drop of 7.6% in December 2015. Meanwhile, the recent PMI figure implies continued uncertainties regarding the outlook as the February NBS PMI contracted for the seventh consecutive month, reaching a seven-year low.

Moreover, continuous capital outflows and contained inflation is also reflecting weakness in economic fundamentals. With the still elevated PPI deflation and flat core inflation, there is a threat of embedded deflation that will result in a self-fulfilling downward spiral in effective demand, investment and corporate profits. In the near term, upward pressure on interest rates and continued liquidity pressures are expected due to huge local government debt swaps, capital outflows, expectations of additional proactive fiscal policy and consequently, higher government bonds supply.

Furthermore, the recent market sentiment and economic data do not indicate any rapid rebound in growth momentum, particularly amidst continued headwinds from trending down investment, led by manufacturing sectors trend and real estate trend. China's growth outlook is also expected to be weighed on by uncertainty regarding global demand and spillovers from other major central banks' policy.

"We maintain our below consensus forecast of 6.0% growth for 2016, with risks tilted to the downside", says Barclays.

Also, structural factors, such as demographics, are expected to remain a drag, indicating the trend of slowdown in growth to remain for many years.