China’s economic growth likely to moderate in H2, inflation faces upside risk

The Chinese economic growth is expected to moderate in the second half of 2016, despite the seemingly stable growth momentum in China, said Nordea Bank in a research note. This is because the support from monetary easing in 2015 would gradually diminish, while housing market has begun cooling down. Almost half of the provinces have missed their growth targets in the first half of 2016.

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

The cooling down of the housing market would eventually weigh in on the construction activities and industrial demand. Also foreign demand continues to be weak as several of China’s huge trading partners are struggling with growth.

Meanwhile, inflation faces an upside risk despite lower oil prices in the second half of 2016. The severe floods in July have resulted in supply disruptions in the farming sector and might push the prices of food upwards. Therefore, China might experience a short period of stagflation. The Chinese yuan is likely to remain weak against the USD, mostly due to stronger USD.

“Outward FDI will likely outpace inward FDI, also supporting a weaker CNY. Finally, the yuan is overvalued compared to long-term fundamentals”, stated Nordea Bank.