China’s GDP growth to moderate to 6.7 pct in 2016, monetary policy to remain accommodative in near future

In the second quarter, the Chinese economy had expanded 1.8 percent sequentially, following a 1.2 percent growth in the first quarter. The growth was mainly due to increased attempts by the government to steady the economy. In the meantime, fixed asset investment expanded 8.1 percent annually year-to-day in August, same as the previous reading. Markedly, private investment stayed at a new record low, rising 2.1 percent year-on-year YTD in August. This shows that the Chinese economy continues to face solid challenges, said Commerzbank in a research note.

On the other hand, investment from state-owned enterprises continued to be solid at 21.4 percent year-on-year YTD in August. The rise in spending in the public sectors shows the government’s attempt to steady the economy.

Even if the stability in growth has eased worries regarding a Chinese hard landing, there continue to be downside risks to China’s growth. This is due to the restrictions to China’s credit-triggered and property-driven growth model, according to Commerzbank.

“For 2016 and 2017, we see growth moderating to 6.7 percent and 6.5 percent from the average of 7.4 percent between 2012 and 2015. Against this backdrop, we believe that the overall monetary policy will remain accommodative in the foreseeable future”, added Commerzbank.

Meanwhile, the positive property market is mainly driving the stability in China’s activity data. Property sales continued to be usually elevated, rising 25.5 percent year-on-year YTD in August, as against a 26.4 percent rise in the earlier month.

China’s housing prices are likely to have risen by 12 percent annually in August, the most rapid pace since 2010, increasing the risk of property bubble. On a further concerned note, commercial banks are chasing property-related business, for instance home mortgages accounted for over half of all new loans by the four big commercial banks in China in the first half of 2016, stated Commerzbank.

The People’s Bank of China, in recent months, has intensively defended the USD/CNY pair at the psychological 6.70 level when the market began to re-price a more rapid Fed hike cycle. Similar actions are expected by PBoC in the near future due to a few reasons.

From 01 October, the CNY has been officially included in the SDR basket. The likely actions include market intervention and imposing measures in the onshore market to control bearish speculation on the CNY.

“Our base case is for USD/CNY at 6.65 by year-end”, noted Commerzbank.