China’s economic growth likely to moderate in H2 2016

China’s economic growth is expected to moderate in the second half of 2016 as the aid from monetary easing in 2015 will gradually diminish and as housing market is beginning to ease, noted Nordea Bank in a research report. The economic growth stabilization seen in the second quarter is unlikely to sustain through 2016.

In July, China was hit by a severe flooding that might raise food prices and inflation for a brief period of time. Given that a weaker yuan against the USD is not accompanied by strong market reaction anymore, China might have incentive to permit for additional depreciation. Looking past the second quarter’s stable growth figures, bearish views remain of the Chinese economy in the short, as well as in medium term, stated Nordea Bank.

“We maintain our expectation of 6.5 percent GDP growth for this year and 6 percent for the next”, added Nordea Bank.

China’s economic growth momentum is likely to begin deteriorating in the second half of this year as policy stimulus might become less effective as it is being expanded beyond means, according to Nordea Bank. Demand in sectors such as heavy industry and exports continue to be weak.

Meanwhile, in the medium term, the aggressive monetary expansion to fund large-scaled public investments risks to set off a burst of the already huge debt bubble. Banks in China are in a decent shape; however, a bank crisis cannot be entirely ruled out if the non-performing loan ratio continues to increase.

July floods are unlikely to considerably impact growth adversely; however, it might result in serious agriculture output disruptions and temporarily accelerate inflation. This, along with the already weak growth scenario, China might witness a short period of stagnation.

“On the CNY, we continue to expect a weakening trend versus the USD, driven mostly by a stronger USD”, said Nordea Bank.

China has stepped back to permit additional forces in recent months; however, it keeps a discrete and occasional intervention in order to avert the risk of outflows.