China’s growth to slow to 5.8 pct next fiscal on property oversupply and debt overhang

In the second quarter of this year, the Chinese economy grew 6.7 percent year-on-year, unchanged from the first quarter. The economy, on a seasonally adjusted basis, expanded 1.8 percent quarter-on-quarter in the second quarter and higher than the 1.2 percent registered in the first quarter. This shows a rebound in the momentum of growth, owing to policy easing and rally in the property market.

However, with the uncertainty in global economy and an expected slowdown in the property market, China’s economy continues to be under downward pressure, noted Commerzbank in a research report.

“We maintain our below consensus forecast of 6.3 percent for this year. For 2017, we expect growth to drop further to 5.8 percent in 2017 due to the property over-supply and debt overhang,” added Commerzbank.

For China to attain higher growth rates, there would be a requirement for further easing. The slowdown in M2 expansion in recent months has provided additional leeway for the People’s Bank of China to loosen its policy.

Moreover, there is a requirement to cut funding cost to urge private investments that have dropped to a record low. But the increasing corporate debt and overheating of the property market would limit the pace of easing. The Chinese authorities are likely to undertake a dynamic policy approach to keep these two problems in control, said Commerzbank.

China is expected to increase its “supply-side reforms” in a bid to compel highly indebted corporates to deleverage. The authorities, on property market front, are likely to implement a new Macro Prudential Assessment (MPA) framework to curb severe increase in p rice in the first-tier cities.

“Overall, we expect PBoC to cut policy rates by 25bps in Q3 and to lower the RRR by 100 – 150bs in H2”, stated Commerzbank.

The future success of China is likely to rely on continued implementation of required macro policies and reforms. But, a shift towards consumption-driven model is still struggling. The capital formation to GDP ratio rose to 46 percent as of 2014 as compared to 42 percent in 2008.

Meanwhile, the final consumption to GDP ratio rose just 1.5 percentage points after the global financial crisis. China’s growth patterns has depended on an unsustainable mixture of investment and credit since the global financial crisis, said Commerzbank. This has resulted in increasing corporate and government debt, rising pressure on financial system and a drop in investment efficiency.